Question 1 [Total: 33 marks] Assume that the CAPM holds, but that the market portfolio is unobservable, so that the retum on the market portfolio is unknown (therefore, so are betas). The annual risk-free rate is 5%. (a) Stock A will pay a dividend of $2 per share in one year and its dividend in subsequent years is expected to grow at a constant rate of 5% per year forever. Its current ex-dividend stock price is \$40. Determine the expected return on Stock A. [4 marks] (b) Stock B is expected to pay a dividend of $0.20 per share in one year, growing at a constant rate of 10% per year forever. Its current price is \$2. By how many times is Stock B's CAPM beta greater than Stock A's? [6 marks] (c) Consider a portfolio that is long 20 units of Stock B and short 1 unit of Stock A. What is the expected dollar payoff on this portfolio if it is liquidated in one year? [5 marks] (d) Suppose we leam that Stock B's CAPM beta is 1.5. Draw the Security Market Line (SML), showing the positions of stocks A1B, the risk-free asset, and the market portfolio on the SML. Make sure to indicate the betas and expected returns of each. [ 6 marks] (e) What is the slope of the SML if Stock B's CAPM beta is equal to 1 (rather than 1.5)? [4 marks] (f) What problem with testing the validity of the CAPM do your answers to parts (d) and (e) above highlight? Explain. [4 marks] (g) Suppose a portfolio manager has been able to beat the market over the last 5 years (i.e., the manager's portfolio mean return exceeds the market's mean return over the last 5 years). Does this provide evidence against the efficient markets hypothesis? Discuss your answer in detail. [4 marks]