Suppose a risky security pays an expected cash flow of $80 in one year. The risk-free rate

Question:

Suppose a risky security pays an expected cash flow of $80 in one year. The risk-free rate is 4%, and the on the market index is 10%.
a. If the returns of this security are high when the economy is strong and low when the economy is weak, but the returns vary by only half as much as the market index, what risk premium is appropriate for this security?
b. What is the security’s market price?

Expected Return
The expected return is the profit or loss an investor anticipates on an investment that has known or anticipated rates of return (RoR). It is calculated by multiplying potential outcomes by the chances of them occurring and then totaling these...