Beta	Expected return
S&P 500 Risk-free security Stock C Stock D	1.0 0.0 0.6 ( )	10.0% 5.0% ( )% 12.5%

1. Figure out the market risk premium.

2.What is the expected return on stock C?

3. What is the beta for stock D?

4.Total risk consists of systematic risk and unsystematic risk.

a.Which risk could be eliminated by diversification strategy? Total risk, systematic or unsystematic risk?

b.Which risk will be priced? In other words, which risk will be important for your investment decision? Total risk, systematic or unsystematic risk?

c.Expected return = risk-free interest rate + ( )* market risk premium.