1. Consider an asset that has a beta of 1.20. If the risk-free rate is 2.0% and the market risk premium is 3%, expected return on the asset is:

A. 5.0%

B. 6.2%

C. 3.2%

D. 5.6%

2. Assume that you are a U.S. investor who is considering investments in the German (Stocks A) and British (Stocks B) stock markets. The world market risk premium is 4.5%. The currency risk premium on the euro is 1%, and the currency risk premium on the pound is −1%. In the United States, the interest rate on one-year risk-free bonds is 4%. In addition, you are provided with the following information:

Stock               A             B

Country          Germany      United Kingdom

βw               1.5              1

γ€                1             −0.25

γ£              −0.25             1.0

Expected return for stock B is: (The U.S. dollar is the base currency).

A. 12%

B. 9.25%

C. 9.75%

D. 7.25%