Question 1

(a) Suppose that you can invest with a continuously compounded rate of 5.25% per annum.

(i) If you invest $50,000 today, how many years will it take for your investment to be worth $1 million?

(ii) If you want your investment to grow to be $1 million in 10 years, how much do you need to invest today?

(iii) Compute the equivalent effective 1-year rate.

(b) Consider two stocks, Stock A and Stock B, where the CAPM betas of the Stock A and Stock B are 1.3 and 0.86, respectively. The cost-of-capitals of Stock A and Stock B are 19.25% and 13.75%, respectively. Find the risk-free rate and the expected return on the market portfolio.