Solution-Calculate the expected return of each stock

1. Consider the following two stocks:

Assume the CAPM holds. Based upon the CAPM, what is the return on the market? What is the risk-free rate?

2. Suppose you observe the following situation:

a. Calculate the expected return of each stock.

b. Assuming the CAPM is true and stock A's beta is greater than stock B's beta by .25, what is the risk premium?

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