1)In Simpleland, the risky asset market consists of only two risky stocks, A and B, whose details are listed below

Stock A B

#ofOutstandingShares 100 150

PricePerShare $1.50 $2.00

ExpectedRateOfReturn 15% 12%

StandardDeviation 15% 9%

Furthermore, the correlation coefficient between the returns of stocks A and B is = 0:1.

(a) What is the expected rate of return on the market portfolio? (b) What would be the standard deviation of the market portfolio?

2)Suppose the CAPM holds and that asset A has a beta of 0.5 and asset B has a beta of 2. Suppose that the expected rate of return on A is 10% and the risk-free rate is 6%.

(a) What is the expected rate of return on the market? (b) What is the expected rate of return on asset B?

3)Assume that the CAPM holds and the risk-free rate is 6% and the expected rate of return on the market is 11%. A share of stock is now selling for $100. It will pay a dividend of $9 per share at the end of the year. Its beta is 1.0. What do investors expect the stock to sell for at the end of the year?