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Stock Y has a beta of 1.3 and an expected return of 18.5%.Stock Z has a beta of 0.70 and an expected return of 12.1%. If the risk-free rate is 8 percentand the market risk premium is 7.5%, are these stock correctly priced?Question 3
Question 3Ri= Rf+ βi (Rm-Rf= Rf+ βi (Market risk premium)Using CAPM to determine the required return from the given market risk:)
Question 3Stock YStock Zβ1.30.70Expected Return18.5%12.1%Required Return8% + 1.3 x 7.5% =17.75%8% + 0.70 x 7.5% =13.25%Correctly Priced?UnderpricedOverpriced
Question 4A stock has a beta of 1.35 and an expected return of 16%.A risk-free asset currently earns 4.8%.
a. What is the expected return on a portfolio that is equally invested in the two assets?
b. If a portfolio of the two assets has a beta of 0.95, what are the portfolio weights?=
c. If a portfolio of the two assets has an expected return of 8%, what is its beta?