Which of the following are assumptions of the Capital Asset Pricing Model (CAPM)? Check all that apply.

Investors assume that their investment activities wont affect the price of a stock.

Assets have unique liquidity.

Investors can borrow an unlimited amount at a risk-free rate.

All assets are perfectly divisible and liquid.

Consider the equation for the Capital Asset Pricing Model (CAPM):

riri

= =

rRF + (rM rRF)rRF + rM rRF

Cov(ri, rM)2MCovri rM2M

In this equation, the term (rM rRF)rM rRF represents the .

Suppose that the markets average excess return on stocks is 12.00% and that the risk-free rate is 1.00%. Complete the following table by computing expected returns to stocks for each beta coefficient using the Capital Asset Pricing Model (CAPM):

bibi	Expected Return to Stocks (%)
0.50
0.30
1.00
3.00

Based on the CAPM and your calculations for the return to stocks, what does it mean when the coefficient bibi > 1?

The stocks return correlates with the stock market as a whole.

The stock is more volatile than the market.

The stock is less volatile than the market.