a) Assuming Treasury bills yield is 1% and the market risk premium is 7%. If your portfolio beta is still 0.25, what is the expected return on this strategy? 10 Marks

b) The following table shows beta for several companies. Calculate each stocks expected rate of return using CAPM, assuming the risk free rate is 4% and the risk premium for the market portfolio is 7%. What is your portfolio beta if you construct an equally weighted portfolio using all stocks? What can you say about this portfolio relative to the market?

Stock Beta

Apple 1.35

Johnson & Johnson 0.69

IBM 1.10