2.

Assume that the risk-free rate of interest is 3% and the expected rate of return on the market is 14%. I am buying a firm with an expected perpetual cash flow of $1,000 but am unsure of its risk. If I think the beta of the firm is 0.9, when in fact the beta is really 1.8, how much more will I offer for the firm than it is truly worth? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Amount offered in excess If the simple CAPM is valid, is the situation shown below possible? Portfolio Risk-free Market A Expected Return 8% 15% 13% Standard Deviation 0% 248 22% Possible Not possible