Correlation and Beta You have been provided the following data about the equities of three firms, the

Question:

Correlation and Beta You have been provided the following data about the equities of three firms, the market portfolio and the risk-free asset:

Expected Return Standard Deviation Correlation* Beta Firm A 0.13 0.38 (i) 0.9 Firm B 0.16 (ii) 0.40 1.1 Firm C 0.25 0.65 0.35 (iii)

Expected Return Standard Deviation Correlation* Beta The market portfolio 0.15 0.20 (iv) (v)
The risk-free asset 0.05 (vi) (vii) (viii)
*With the market portfolio.

(a) Fill in the missing values in the table.

(b) Is the equity of Firm A correctly priced according to the capital asset pricing model (CAPM)? What about the equity of Firm B? Firm C? If these securities are not correctly priced, what is your investment recommendation for someone with a well-diversified portfolio?

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