Let ra be the return of stock A, and rm be the market return with E[TM] = 12%, and the risk-free rate is given by rs = 2%. Suppose that the correlation coefficient between rA and I'm is 0.5, and the variances of rA and I'm are Var(ra) 9 and Var(rm) 100, respectively. Answer the following questions by using Capital Asset Pricing Model (CAPM). The reasonable expected return of asset i, given by CAPM, is E[ri] = ry + B (E[mm] -r), where B; is the sensitivity of r; to the overall movement of the market, Bi Covri, rm) Var(rm) (a) Find the beta of stock A, denoted as BA. (A) 1.5 (B) 0.5 (C) 0.15 (D) 0.45 (b) What is the reasonable expected return of stock A, denoted as E[ra]? (A) 3.0% (B) 3.5% (C) 4.0% (D) 4.5% (c) Let PA be the price of stock A at time t, where t = 0,1. Suppose that E[P4] dollars per share, what is the reasonable price for stock A at time 0? (A) 99.52 (B) 100 (C) 100.48 (D) 104 (d) If at time 0, stock A is currently priced at 100 dollars per share, then it is (A) underpriced (B) correctly priced (C) overpriced (D) none of the above. = 104 (e) Following (d), what should be your trading strategy at time 0, in order to make money? (A) Buy stock A (B) Hold stock A (C) Sell stock A (D) All of the above