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Securities A and B are priced in line with the CAPM and exhibit the following return characteristics: Security B A 8% 0

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Securities A and B are priced in line with the CAPM and exhibit the following return characteristics: Security B A 8% 0.46% B 16% 1.2 (a) Determine the beta and the expected return of the market portfolio M as well as the risk-free rate. (b) Give the equations for the capital market line and the security market line. (c) Calculate the standard deviation om of the market portfolio under the assumption that the covariance between A and M is 0.00225. (a) Sketch the relationship between expected return and systematic risk in this market. Do not forget to label the axes and other elements properly. (e) Considering to the table below, are stocks D and Efairly priced, underpriced, or overpriced? First determine the cost of capital implied by the Dividend Discount Model. In a second step, compare this rate to the expected return predicted by the CAPM. What would be the consequence of any mis-pricing you find? Stock Current price (P) Current dividend (D.) Dividend growth rate (9) B D 100 4 0% -0.2 E 21 2 5% 1.6