2 Bernice Williams and Marcia Cooper and young Investment Analysts in a reputable investment firm. They are approached by Delroy Brown a potential investor, who wants to invest in the securities market. He has limited knowledge of how the securities market work, but a friend told him about securities that are undervalued and overvalued. Both Bernice and Marcia explained to him that the valuation of securities is based on the present value of the future cash flow. They went on to show him an example of how to identify overvalued, undervalued or properly valued securities. They used the Capital Assets Pricing Model (CAPM) to illustrate this concept. The risk-free rate of return is 10% and the market rate of return is 14%. Stock X Beta 0.85 Y 1.25 Z -0.20 Required: A. Compute the required rate of return for Stock X, Y and Z (6 marks) You ask a stockbroker what the firm's research department expects for the three (3) stocks above, that is, Stock X, Y and Z. The broker responds with the following information: Stock Current Price X 22 Expected Price 24 Y 48 51 Z 37 40 Required: Expected Dividend 0.75 2.00 1.25 B. Calculate the estimated future rate of return for Stock X. Y. and Z. (6 marks) C. Determine which stock is overvalued, undervalued, properly valued, and state why. (3 marks) D. Illustrate with the use of the Security Market Line (SML) how Stock X. Y and Z would (5 marks) appear on it. B. You have recently received $100,000 and you are considering investing $40,000 in the JMMB and $60,000 in CPJ. Your analysis of each stock revealed the following information. The Expected Returns of both companies are 11% and 15% respectively and the Standard Deviations are 8% and 11% respectively. The correlation between the companies is 0.75. Compute the expected return of the portfolio ii. Compute the standard deviation of the portfolio (3 marks) (7 marks)