Example 3: If the risk free rate is 8% and the expected return on the market is 12% Security Beta Expected Return Microsoft 1.6 16% McGraw-Hill 1.2

Example 3: If the risk free rate is 8% and the expected return on the market is 12% Security Beta Expected Return Microsoft 1.6 16% McGraw-Hill 1.2 11% What is the market risk premium? What is the risk premium on Microsoft and McGraw-Hill" stocks? According to CAPM, what are the expected returns on Microsoft and McGraw-Hill"s stock? Draw the security market line for the above security? Are these securities correctly priced? If not, are they over or under-valued?