CAPM: Recap exercises.

• Stock A has an expected return of 4.2% and a risk of β = 0.8, while stock B has
an expected return of 8% and a risk of β = 1.25. The expected return on the
market is 5% and the risk-free rate is 1%.

– What is the alpha of each stock? Plot the SML and each stock’s risk-return
point on one graph. Show the alphas graphically.

• The risk-free rate is 1% and the expected return on the market portfolio is 7%.
A firm considers a project that is expected to have a beta of 0.9.

– What is the required rate of return on the project?

– If the expected IRR of the project is 7%, should it be accepted?

• The excel file ”Data stocks” contains data on the risk-free rate, the market
portfolio and on four stocks (Bank of America, Apple, Amazon, and Nike):

– Compute alpha and beta values for the four stocks.

– What is the beta value of a portfolio that invests 25% in each stock?

• Solve the following end of chapter problems from chap. 9: problem 3 and 10-15.