Question
1. Stock M has a beta of 1.4 and an expected return of 25 percent. Stock N has a beta of .85 and an expected
1. Stock M has a beta of 1.4 and an expected return of 25 percent. Stock N has a beta of .85 and an expected return of 15 percent. If the risk-free rate is 6 percent and the market risk premium is 10.3 percent, are these stocks correctly priced? Which one is undervalued or overvalued?
2. You have $100,000 to invest in Stock D, Stock E, and a risk-free asset. You must invest all of your money. Your goal is to create a portfolio that has an expected return of 14 percent and is as risky as the overall market. If D has an expected return of 18 percent and a beta of 1.50, E has an expected return of 15.2 percent and a beta of 1.15, and the risk-free rate is 6 percent, and if you invest $50,000 in Stock D, how much will you invest in Stock E?
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