Explain your answer. Lets say the CAPM holds & the market price of a stock is $P₀, the stocks expected rate of return is ^E(R_j0), the riskless rate of interest is R_f , and the market risk premium is E(R R_m ) R_f .

Q1.a What will be the stocks current price if its expected future payoff remains the same but the covariance of its rate of return with the market portfolio doubles?

The market portfolios expected rate of return is E(R_m ), the riskless rate of interest is R_f and the standard deviation of the return on the market portfolio is (R_m).

Q1.b Would you recommend investment in a stock with an expected rate of return of E(R_j )and a covariance of its return with the market return of Cov(R R_j, _m ).

Q1.c Suppose that in the nest period the return on the stock was only Rj1 over the preceding period. how would you explain this ex-post return?