As a Chief Investment Officer, you have earlier explained risk, return, and Capital Asset Pricing Model (CAPM) to your junior analysts and you are now asking them to response to following question:

Suppose you have estimated the following probability distribution of the expected future returns for Stocks C and D

	Stock C	Stock D
Probability	Return	Return
0.2	-0.1	0.02
0.2	0.1	0.07
0.2	0.15	0.12
0.2	0.2	0.15
0.2	0.4	0.16

What is the expected rate of return for Stock C? Stock D?

What is the standard deviation of expected returns for Stock C? Stock D?

(iii) Which stock would you consider as riskier? Why?

(iv) Which stock would you choose to invest? Why?

(b) According to the CAPM, the expected return on a risky asset depends on three components. Describe each component, and explain its role in determining the assets expected return.