1. (a) CAPM postulates the nature of the relationship between the expected return and the systematic risk of a security. Explain.

(b) A chemical company paid a dividend of Rs. 2.75 during the current year. Forecast suggests that earnings and dividends of the company are likely to grow at the rate of 8% over the next 5 years and at a rate of 5% thereafter. Investors have traditionally expected a rate of return of 20% on these shares. What is the present value of stock?