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please type answer Problem 4: (12 marks) A security analyst has forecasted returns on the market portfolio and shares of RIM under three different economic
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Problem 4: (12 marks)
A security analyst has forecasted returns on the market portfolio and shares of RIM under three different economic conditions for next year:
State of the economy Probability
Boom
Moderate Growth Recession
Market 14 35% 12 11%
13% -14%
Return on
Return on RIM
55%
14 -6%
(a) Calculate the expected returns on the market portfolio. (2pts)
(b) Calculate the beta for RIM, assume the expected return for RIM is 16.75%. (6pts)
(c) Assuming the risk-free rate is 6%:
(i) Calculate the market risk premium (1pt)
(ii) According to the CAPM, what is the required return for RIM? Compare this to the expected return of RIM (expected return is 16.75%). What is the implication of your finding? (3pts)
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