Consider you are a fund manager for a mutual fund and are expected to value a few stocks to make decision on whether or not to invest them.The government recently announced that the new rate will be 2.1 %.The government issued a 2.45%-5-year treasury bill,shortly after the announcement.

a.If you plan on using CAPM to calculate expected return of on the stocks, discuss whether which rate will you use as the risk-free rate if you have a 5-year investment horizon.

b. Calculate the expected return on the FFBL stock considering a beta of 1.2 %, using both the policy rate, as well as the yield on the government T-bill, if the Pakistan Stock Exchange has yielded return of 6.7 % in the last 5 years.