Let the risk-free rate be (3 %) and the market return and risk be (left(mu_{M}=ight.) (left.8 %,

Question:

Let the risk-free rate be $3 \%$ and the market return and risk be $\left(\mu_{M}=ight.$ $\left.8 \%, \sigma_{M}=10 \%ight)$. Given an asset with $\beta=0.8$ and a return standard deviation of $12 \%$, you expect its price to be $\$ 110$ in one year.

(a) According to CAPM, what is today's price of the asset?

(b) What is the correlation between the asset and market returns?

(c) What fraction of the variance of the asset's return is diversifiable?

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