You are given the following information about the beta coefficient, retums as expected by your brokerage firm, the expected return of the market and the amount you should allocate to cach stock E(RM) 20% and the risk-free rate is 4% (Select all correct answers below and show your calculation on your exam paper) i Calculate the equilibrium rate of return E(R) of each stock according to the CAPM 2 Based on your broker's prediction, explain which stock is underpriced and which stock is overpriced

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You are given the following information about the beta coefficient, retums as expected by your brokerage firm, the expected return of the market and the amount you should allocate to cach stock E(RM) 20% and the risk-free rate is 4% (Select all correct answers below and show your calculation on your exam paper) i Calculate the equilibrium rate of return E(R) of each stock according to the CAPM 2 Based on your broker's prediction, explain which stock is underpriced and which stock is overpriced. What is your buy and sell decision? 3. Calculate the bota of the portfolio invested in these 4 stocks 4. Calculate the expected return of the portfolio invested in these 4 stocks C Stock Investment ? $400,000 B $600,000 ? $500,000 D $700,000 Beta Broker's expectation 1.5 25% -0.5 2% 1.25 22% 0.75 18% Bu A and B as they are undervalued and sell C and D as they overpriced Stock E(AI) ? B ? D 2295 16% 30% 16% Bu A and D as they are underpriced and sell B and C as they are overpriced Stock ER) 28%
Stock Investment A $400,000 B $600,000 ? $500,000 D $700,000 Beta Broker's expectation 1.5 25% -0.5 2% 1.25 22% 0.75 18% Bu A and B as they are undervalued and sell C and D as they overpriced Stock E(RI) ? B ? D 22% 16% 30% 16% Bu A and D as they are underpriced and sell B and C as they are overpriced Stock B C D E(RI) 28% -4% 24% 16% Portfolio Beta 1.0 Stock E(RI) 3296 A B
Stock ? B ? D E(1) 32 255 -4 16 Stock ERI) A B 23% 7 30 16% D Portfolio return 20.11% 14.55% Portfolio return Portfolio Beta 0.8 Buy B and D as they are underpriced and sell A and C as they are overpriced Portfolio Beta 0.875 Buy C and D as they are underpriced and sell A and B as they are overpriced Portfolio beta 0.659 Portfolio return 18.00% Portfolio return 16.76
Stock ER ? 23% 79 30% 16% 20.11% Portfolio return Portfolio return 14.55% Portfolio Beta 0.8 Buy B and D as they are underpriced and sell A and C as they are overpriced Portfolio Beta 0.875 Buy C and D as they are underpriced and sell A and B as they are overpriced Portfolio beta 0.659 Portfolio return 18.00% Portfolio return 16.76%