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Exercise 1 (20 points): Suppose the risk-free return is 2% and the market portfolio has an expected return of 12% and a volatility of 16%.

Exercise 1 (20 points):

Suppose the risk-free return is 2% and the market portfolio has an expected return of 12% and a volatility of 16%. Merck & Co. (Ticker: MRK) stock has a 25% volatility and a correlation with the market of 0.8.

a. What is Mercks beta with respect to the market?

b. Under the CAPM assumptions, what is its expected return?

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