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1. Define the Capital Asset Pricing Model (CAPM).

2. Define "beta" as it applies to common stocks.

3. You have two stocks in your portfolio. $20,000 is invested in a stock with a beta of 0.6 and $40,000 is invested in a stock with a beta of 1.4. What is the beta of your portfolio?

4. If the risk-free rate is 2% and the expected rate of return on the stock market is 7%, what is the required rate of return on a stock with a beta of 1.4 according to the CAPM?

Answers:

3: 1.13

4: 9.0%