You have the following information:

cov(rA, rm) = 0.5

cov(rB,rm) = 0.25

cov(rC,rm) = 0.75

cov(rm,rm) = 0.5

Where rm is the return on the market index. Assume that the market excess return is 5% and the risk-free rate is 2%.

a) Compute the beta for the three stocks.

b) What does a beta bigger than one imply?

c) Compute the expected return based on CAPM.

d) If you invest 20% in A, 30% in B, and 50% in C, compute the beta and excess return of such aportfolio.

e) If the realized/observed return of stock A, B, and C are 7.5%, 4%, and 13% respectively, is therean alpha?

f) Based on your answer to e), is CAPM valid?