Given the following data: Expected return on the market index = 15% Standard deviation on the market index = 20% Treasury bill rate = 5% Casa Inc. common stock beta = 2 Yale Inc. common stock beta = 1 Forecast return for Casa = 20% Forecast return for Yale = 17%

Required: (a) State the Capital Asset Pricing Model (CAPM) equation and explain what kinds of relationships it shows. Should you include standard deviation of returns in the calculation of the expected return on a security using CAPM? Why? Explain your answers within 100 words. (6 marks) (b) Based on Capital Asset Pricing Model (CAPM), should you recommend to buy or sell stocks of Casa and Yale respectively? Support your recommendations with all relevant calculations. Conclude your answer with 45 words