Question C3 William, a research analyst of an investment bank, obtains the information about expected returns and risk levels of the following stocks from financial database: Stock P Q R Expected Return ??? 13.5% 8.5% Beta 1.2 1.6 0.9 It is observed that Stock P and Stock Q are correctly priced under CAPM. The risk-free rate is 2.5% Required: (a) Calculate (i) the expected market return [rounded to 3 decimal places) and (ii) expected return of Stock P. (4 marks) (b) Describe how the mispricing of Stock R will be adjusted if CAPM is held. Support your answer with calculations. (5 marks) (c) Calculate the systematic portion and unsystematic portion of unexpected returns of Stock Q if the actual return of Stock Q is 14.5% and the actual market return is 0.8% higher than the expected market return calculated in part (a). (4 marks) (d) Describe briefly how size factor and value factor affect the expected return of an asset under Fama-French Three-Factor Model. (2 marks)