Question 3

Your boss has given you the following information about two stocks.

Stock ticker	Beta	Expected return
UU	1.82	19.75%
QQ	0.75	8.45%

He also told you that CAPM holds and that these stocks are fairly priced, that is, priced according to CAPM. Answer the following questions.

(Round your final answers to 2 decimal places)

[Total marks: 5 + 5 = 10 marks]

1. Calculate the risk-free rate. [5 marks]
2. Calculate the expected return on the market. [5 marks]