1.Suppose that the expected return on the market portfolioE(R_m )=0.07 , return on the risk-free rate r_f=0.01 and a variance _m^2=0.025. Use the Capital Asset Pricing Model (CAPM) to calculate the expected return of a risky asset i that has a covariance _im=0 with the market return, also interpret the beta of this security.[4]

2. Securities A and B have forecasted returns of 14% and 18% over the next 12 months. During the same period, the market (M) is expected to generate returns of 16%. If the risk-free rate is 6%, and _A= _B= 1.1, use the CAPM and the SML to determine whether the securities are correctly valued. [4]