Problem 2: CAPM a) Consider CAPM. What is the formula for predicted (excess) returns E(R) - Rr. Use this formula and estimated beta's to fill in CAPM prediction column in Table 1 below. b) What is the formula for CAPM pricing error a if you know E(R) - R, and CAPM prediction above? Use this formula to calculate CAPM a and fill in respective column in Table 1. c) Calculate the ratio of CAPM pricing error to E(R) - R, and express this ratio in %. This shows how big/small the pricing error is in percentage terms of expected excess return. Fill in the appropriate column in Table 1 Comment on the results you find. Does CAPM do a good job explaining expected stock returns? Table 1 CAPM prediction CAPM a E(R)-R RI-Rf R2-Rf R3-RE R4-Rf RS-RE RM-Rf Er-Rf 0.732 0.757 0.855 0.955 1.025 0.658 beta 1.092 1.080 1.114 1.154 1.417