THE CAPITAL ASSET PRICING MODEL

10. The risk free rate of return is 3.75 percent and the market return is expected to be 9.75 percent. Determine the required rate of return for a share of common stock with a beta of 1.25.

11. The risk free rate of return is 4.75 percent and the market return is expected to be 8.75 percent. Determine the required rate of return for a share of common stock with a beta of 0.85.

12. Discus the notion of risk and return relationship in the context of the CAPM.

13. Explain the terms commonly used in finance such as required return on investment, beta, systematic risk, the market risk, volatility, the security market line, beta, covariance and variance.