1. If the rate of return on the S&P 500 index was 23% for 2009, and the risk-free rate at the end of 2009 was 1%, calculate the equity risk premium for 2009? Recalculate the equity risk premium using 1981 data, when the risk free rate was 15% and the S&P 500 index return was minus 10%. What are the implications of different equity risk premia numbers for different time periods? HINT: Write out the CAPM equation and think through the question analytically, in terms of the inputs to the equation and the output.

2. As of early September 2010, Wal-Mart's (WMT) beta is 0.33 and Target Stores (TGT) beta is 1.02. Discuss the meaning of these two betas, analytically, by briefly setting forth the process for calculating beta and the inputs to the calculations where beta is the output, i.e., the slope of the characteristic line.

3. The risk free-rate as of early September 2010 was the yield on a 10-year Treasury bond, 2.8%. Assuming that the long-term historical rate of return (and the expectation for the future as well) on the S&P 500 Index is 9%, apply the CAPM equation and calculate the expected rate of return for Wal-Mart and Target Stores stock.

4. Explain why the beta of the S&P 500 Index is 1.0