1. You are given the following information about two stocks, the market index and the risk free rate. The forecasted returns are based on your own research and are not the expected returns based on CAPM Stocks Forecasted Return Standard Deviation Beta 14% 19% 14% 5% 36% 25% 15% 0.8 1.5 IBM CSCO Market Risk-free (a) Assume the forecasted market return is the true expected market return. Calculate the ex- pected return for each stock based on the CAPM model (b) If your forecasted returns are correct, are these stocks over or undervalued based on the CAPM model? Why? (c) You decide to form an equal-weighted portfolio of the two stocks, what is the forecasted return and standard deviation of the portfolio if the covariance between IBM and CSCO is .01? (d) You estimate the Fama-French 3-factor model for the two stocks and find the following coef- ficients. You also estimate risk premiums for each factor. Calculate the expected return for each company using the 3-factor model 1. You are given the following information about two stocks, the market index and the risk free rate. The forecasted returns are based on your own research and are not the expected returns based on CAPM Stocks Forecasted Return Standard Deviation Beta 14% 19% 14% 5% 36% 25% 15% 0.8 1.5 IBM CSCO Market Risk-free (a) Assume the forecasted market return is the true expected market return. Calculate the ex- pected return for each stock based on the CAPM model (b) If your forecasted returns are correct, are these stocks over or undervalued based on the CAPM model? Why? (c) You decide to form an equal-weighted portfolio of the two stocks, what is the forecasted return and standard deviation of the portfolio if the covariance between IBM and CSCO is .01? (d) You estimate the Fama-French 3-factor model for the two stocks and find the following coef- ficients. You also estimate risk premiums for each factor. Calculate the expected return for each company using the 3-factor model