Question

According to CAPM, the expected return on a risky asset depends on three components. Describe each component and explain its role in determining expected return.[7 marks] (i) What does a

stock's standard deviation measures? (ii) What does a stock's beta measures? (iii) If a particular stock had no systematic risk, only unsystematic risk, what would be its expected return?[7 marks] c. The table below gives the amount invested and betas for three stocks. Using the CAPM, if the expected return for the market is 9.4% and the risk-free rate is 3.6%, what is the expected return for each stock? [3 marks]What is the beta for this portfolio based on the invested amounts? Using the CAPM, what is the expected return for this portfolio? i. Calculate the following for the two stocks: (a) the expected return, (b)variance, and (c) the standard deviation[7 mar! ii. Which stock is riskier?

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