1. You expect the risk-free rate (R_F) to be 5% and the market return R_M to be 9%. You also have the following information about three stocks.

STOCK BETA Current Price Expected Price Expected Dividend

X 2.50 $ 22 $ 23 $ 2

Y -1.0 $ 40 $ 43 $ 3

Z 2.00 $ 45 $ 49 $ 4

a. What are the required rates of return for the three stocks X, Y and Z according to the CAPM?

b. Calculate the anticipated returns of the 3 stocks

c. Calculate the the alpha coefficient of every stock

d. What is your investment strategy regarding these three stocks?

e. What is the equilibrium price E(P0) of each stock?