Assume that most of the investors in the stock market are active in an online chat group. As one of the investors holding ABC shares, you find out that the ABC stock has an expected return of 9.8% from the perspective of most investors in the chat group. In addition, you gathered the following information by carrying out market research. In your research, the market return is 6.8% and the risk-free rate is estimated to be 3%. The beta and past 1-month variance of Stock ABC is 1.2 and 7.8% respectively. The stock price exhibits an upward trend last week. (a) What is the expected return of Stock ABC according to CAPM? (10 marks) (b) Should you buy or sell Stock ABC if CAPM is correct? Why? (10 marks) (c) With respect to your market research, suggest the information that you can use to determine your subsequent transaction in Stock ABC. You can assume the market is weak form efficient. (Word limit - 150 words) (15 marks)

(a) The expected return of Stock ABC according to the Capital Asset Pricing Model (CAPM) can be calculated using the formula:

Expected Return = Risk-Free Rate + Beta * (Market Return - Risk-Free Rate)

Substituting the given values:

Expected Return = 3% + 1.2 * (6.8% - 3%) = 3% + 1.2 * 3.8% = 3% + 4.56% = 7.56%

(b) If the CAPM is correct, the expected return of Stock ABC is 7.56%, which is lower than the expected return of 9.8% from the perspective of most investors in the chat group. Therefore, if you believe in the accuracy of the CAPM, you should sell Stock ABC because its expected return is lower than what the market expects.

(c) In a weak form efficient market, all past price information is already reflected in the current stock price. Therefore, the upward trend of Stock ABC last week and its past 1-month variance of 7.8% are not useful for predicting future price movements. However, the beta of Stock ABC, which measures its sensitivity to market movements, can be used to assess the risk of the stock. If the market is expected to rise, a stock with a high beta like ABC (1.2) could potentially offer high returns. But it also means higher risk if the market falls. Therefore, your subsequent transaction in Stock ABC should be based on your risk tolerance and market outlook.