Suppose that you are a senior financial analyst at a large global company. Your CEO (Rachel Williamson) has recently sent you the following email.

From: Rachel Williamson

To: [your name]

Subject: Finance questions Dear [your name],

A lot of employees of our firm have told me that you are an expert in finance. So, I would like to ask you a few questions related to finance. I would greatly appreciate your help.

- (QUESTION 1) As you know, our firm uses NPV for capital budgeting. I have heard that PI (profitability index) is a useful capital budgeting technique. What is PI? What is the PI rule? How different are the NPV rule and PI rule from each other? Please explain briefly.

- (QUESTION 2) Suppose that Stock A has a beta of 0.7 and Stock B has a beta of 1.2. Which stock must have a higher actual return next year according to the capital asset pricing model? Please explain briefly.

(Please answer my questions clearly in simple terms. I will be ok with some formulas, but please try to minimize the use of them. Please do not copy and paste sentences from other sources. I would like to know your thoughts and see your writings on the above issues.)