Stocks L & M have the following probability distributions of expected future returns. (3 Marks) Probability L M 0.1 (9%) (32%) 0.3 4 0 0.1 10 22 0.4 21 26 0.1 33 42

1. Calculate the expected rate of return, rL & rM, for stocks L and M.

2. Calculate the standard deviation of expected returns, for Stock L.

3. Now calculate the coefficient of variation for Stock M.

b- A stock has an expected return of 13.725%. The beta of the stock is 1.33 and the riskfree rate is 7.05%. What is the market risk premium, RPM?