Consider three stocks: Q, R and S. Beta

STD (annual)

Forecast for Nov 2009

Dividend

Stock Price

Q

0.40

35%

$0.45

$45

R

1.40

40%

0

$75

S

-0.25

40%

$1.05

$20

Use a risk-free rate of 2.0% and an expected market return of 9.5%. The market's standard deviation is 18%. Assume that the next dividend will be paid after one year, at t = 1.

a. According to the CAPM, what is the expected rate of return of each stock?

b. What should today's price be for each stock, assuming the CAPM is correct?