Consider the following questions about CAPM:

1. What is the equilibrium relationship between return and risk that must hold for every risky asset in a perfect market?

2. Define systematic and non-systematic risk.

3. Suppose that the annual returns on two stocks (A and B) are perfectly negatively correlated, and that rA = 0.05, rB = 0.15, A = 0.1, B = 0.4. Assuming that there are no arbitrage opportunities, what must the one-year interest rate be?

4. The expected return on the market portfolio, rm is 13%. The standard deviation of the market return, m, is 0.20. The covariance of a well-diversified portfolio with the market, mp, is 0.03. What is the expected return on the portfolio? Use the answer from part 3