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CAPM: Assume that in the economy there are three assets: a risk-free asset and stocks of Firm A and Firm B. The return of

CAPM: Assume that in the economy there are three assets: a risk-free asset and stocks of Firm A and Firm B. The return of the risk-free asset is 5%. Assume that the CAPM holds and the expected return and standard deviation of the market portfolio are E[RM] standard deviation of 44%. Stock B has a beta of 0.3, and the correlation between stock B and the market is 0.6. (10 points) 10% and oM = 30%. Stock A has an average ret urn of 10.5% and (a) What is the beta of stock A? (4 points) (b) What is the Sharpe ratio of stock B? (3 points) (c) Suppose there are two dates t = 0 and t = 1. At date 1, Firm A will pay $8/share as a dividend, and stock price will be $30. Firm B will pay $11/share as a dividend, and stock price will be $35. What is the fair price of one share of stock A and B at date 0? (3 points)

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