Consider two stocks, A and B. Stock A has an expected return of 10% and a beta of 1.1. Stock B has an expected return of 16% and a beta of 1.2. The market degree of risk aversion, A, is 4. The variance of return on the market portfolio is 0.0175. The risk-free rate is 5%. Required: (4*2.5 = 10pts) A. What is the expected return of the market? B. Using the CAPM, calculate the expected return of stock A. C. Using the CAPM, calculate the expected return of stock B. D. Which one of those two stocks is best to buy? Why?
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