1.You are provided with the following information on three stocks, X, Y and Z. marks 15

Stock

Beta

Current Price

Expected Price

Expected Dividend

X

0.8

$12.50

$13.10

$0.80

Y

1.1

$8.25

$9.76

$0.20

Z

2.1

$25.70

$30.04

$0.00

(i)What are the expected returns for stocks X, Y, and Z for the next period based on the above prices and dividends?

(ii)If the expected return on the market is 11.5% and the risk-free rate of return is 4.5%, then what are the required rates of return for stocks X, Y, and Z based on the CAPM?

Using the expected and required returns on the three stocks and their respective beta values, draw the security market line (SML) to show that while the required rates of return on the three securities lie on the SML, the expected ones may lie above, below or on the SML and show whether these stocks are undervalued or overvalued