Grace Corporation is considering the following investments. The current rate on Treasury bills is 2.5 percent and the expected return for the market is 10 percent.

Stock	Beta
K	1.13
G	1.34
B	0.89
U	0.92

a.Using theCAPM, what rates of return should Grace require for each individualsecurity?

b.How would your evaluation of the expected rates of return for Grace change if therisk-free rate were to rise to 4.5 percent and the market risk premium were to be only 7 percent?

c.Which market risk premium scenario(from part a or b) best fits a recessionaryenvironment? A period of economicexpansion? Explain your response.