(Capital asset pricing model)Grace Corporation is considering the following investments. The current rate on Treasury bills is

2

percent and the expected return for the market is

9

percent.

Stock	Beta
K	1.12
G	1.37
B	0.84
U	1.02

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a.Using the CAPM, what rates of return should Grace require for each individual security?

b.How would your evaluation of the expected rates of return for Grace change if the risk-free rate were to rise to

3

percent and the market risk premium were to be only

6.5

percent?

c.Which market risk premium scenario (from part a or

b)

best fits a recessionary environment? A period of economic expansion? Explain your response.

Question content area bottom

Part 1

a.The expected rate of return for security K, which has a beta of

1.12,

is

enter your response here%.

(Round to two decimal places.)