Currently the risk-free rate equals 5% and the expected return on the market portfolio equals 11%. An

Question:

Currently the risk-free rate equals 5% and the expected return on the market portfolio equals 11%. An investment analyst provides you with the following information:

a. Indicate whether each stock is overpriced, underpriced, or correctly priced.
b. For each stock, subtract the risk-free rate from the stockâ€™s expected return and divide the result by the stockâ€™s beta. For example, for asset A this calculation is (12% âˆ’ 5%) Ã· 1.33. Provide an interpretation for these ratios. Which stock has the highest ratio and which has the lowest?
c. Show how a smart investor could construct a portfolio of stocks C and D that would outperform stock A.
d. Construct a portfolio consisting of some combination of the market portfolio and the risk-free asset such that the portfolioâ€™s expected return equals 9%. What is the beta of this portfolio? What does this say about stock D?
e. Divide the risk premium on stock C by the risk premium on stock D. Next, divide the beta of stock C by the beta of stock D. Comment on what you find.

Stocks
Stocks or shares are generally equity instruments that provide the largest source of raising funds in any public or private listed company's. The instruments are issued on a stock exchange from where a large number of general public who are willing... Portfolio
A portfolio is a grouping of financial assets such as stocks, bonds, commodities, currencies and cash equivalents, as well as their fund counterparts, including mutual, exchange-traded and closed funds. A portfolio can also consist of non-publicly...