4a. Stock A has a beta of 1.20 and Stock B has a beta of 0.8. Suppose RF = 2% and RM = 12%.

(a) According to the CAPM, what are the expected returns for each stock? Comment.

(b) What is the expected return of an equally weighted portfolio of these two stocks? Comment. (c) What is the beta of an equally weighted portfolio of these two stocks? Comment.

(d) How can you use your answer to part (c) to answer part (b)? Comment.

4b. Suppose you estimate that stock A has a volatility of 32% and a beta of 1.42, whereas stock B has a volatility of 68% and a beta of 0.75.

a. Which stock has more total risk? Comment.

b. Which stock has more market risk? Comment.

c. Suppose the risk-free rate is 2% and the markets expected return is 10%. Which firm has a higher cost of equity capital? Comment.