3.

Stock A has an expected return of 8% with a standard deviation of returns of 30%. The market risk premium is 6% and the market portfolios volatility is 20%. The risk-free rate is 5%.

a. What is the correlation of stock A returns with those of the market?

b. Investors expect firm A to pay a dividend of $10 per share at the end of each year in perpetuity. What is the price of a share of stock A?

c. Firm A has 50,000 shares outstanding and its market value constitutes 8% of the market portfolio. Firm B has 10,000 shares outstanding and constitutes 2% of the market portfolio. What is the share price of stock B?