1.On the basis of an analysis of past returns and of inflationary expectations, Marta Gomez

feels that the expected return on stocks in general is 12 percent. The risk-free rate on

short-term Treasury securities is now 7 percent. Gomez is particularly interested in the

return prospects for Kessler Electronics Corporation. Based on monthly data for the past

five years, she has fitted a characteristic line to the responsiveness of excess returns of the

stock to excess returns of the S&P 500 Index and has found the slope of the line to be 1.67.

If financial markets are believed to be efficient, what return can she expect from investing

in Kessler Electronics Corporation?

2.Currently, the risk-free rate is 10 percent and the expected return on the market portfolio

is 15 percent. Market analysts' return expectations for four stocks are listed here,

together with each stock's expected beta.

STOCK EXPECTED RETURN EXPECTED BETA

1. Stillman Zinc Corporation 17.0% 1.3

2. Union Paint Company 14.5 0.8

3. National Automobile Company 15.5 1.1

4. Parker Electronics, Inc. 18.0 1.7

a. If the analysts' expectations are correct, which stocks (if any) are overvalued? Which (if any) are undervalued?

3.Selena Maranjian invests the following sums of money in common stocks having expected returns as follows:

COMMON STOCK (Ticker Symbol) AMOUNT INVESTED EXPECTED RETURN

One-Legged Chair Company (WOOPS) $ 6,000 0.14

Acme Explosives Company (KBOOM) 11,000 0.16

Ames-to-Please, Inc. (JUDY) 9,000 0.17

Sisyphus Transport Corporation (UPDWN) 7,000 0.13

Excelsior Hair Growth, Inc. (SPROUT) 5,000 0.20

In-Your-Face Telemarketing, Inc. (RINGG) 13,000 0.15

McDonald Farms, Ltd. (EIEIO) 9,000 0.18

a. What is the expected return (percentage) on her portfolio?