1. The risk-free rate in a given economy is 5%, and the expected rate of return on the market is 10%. I am buying a firm with a perpetual annual cash flow of Rs. 2,000. If I think the beta of the firm is 0.8, when the beta is in fact 1.6, how much more will I offer for the firm than it is really worth?
2. Sarah owns a portfolio of stocks that have a market value of Rs. 50,000, and an estimated CAPM beta of 0.90.

(a) If the market risk premium is 9%, and the risk-free rate is 6%, what is the expected equilibrium return on this portfolio?

(b) If Sarah decides to sell one of her holdings that has a market value of Rs. 10,000 and a beta of 0.75, and invest the proceeds in another stock having a beta of 1.3, what is the new equilibrium expected return on her portfolio?

1. Suppose you have the following investment options available: (a) Risk-free asset with a rate of return 8%, and (b) Risky asset earning an expected return 20%, and standard deviation 40%. If you construct a portfolio of the above two instruments with a standard deviation of 30%, what will the expected return of your portfolio be?