The market portfolio (M ) has the expected rate of return E(rM ) = 0.12. Security A is in the market portfolio. We know E(rA) = 0.17 and A = 1.5.

(a) What is the rate of return of the risk-free asset (rf )?

(b) A new security (B) is introduced to the market. B = 0.8. Then what is fair expected rate of return of security B?

(c) Another new security (C) is introduced to the market. C is 0.6, and from the market price, investors calculate E(rC) = 0.1. Is C overpriced or underpriced? What is C?