Assume that you knew with certainty that a stock will be worth $125 at the end of one year from now. Its beta is 1.50 and the market risk premium is 15%. The risk free rate is 5%. The current price of the stock is $90. You believe in the accuracy of the CAPM. Based on this information you can conclude that

(a) The stock is fairly priced.

(b) The stock is overpriced

.(c) The stock is underpriced.

(d) The true stock price cannot be determined.(e)

All of the above are correct.

2. You are told that the return on the market is 21% and that the standard deviation of themarket return is 14%. The risk-free rate of return is 5%. The covariance of a stocks return withthat of the market is .45%. Its standard deviation of return is 20%. You are asked to evaluatethe beta of the stock. The beta of the stock is

(a) .229(b) 2.40(c) 1.42(d) 2.30(e) 1.853.

Find the expected (mean) rate of return and standard deviation of a portfolio where 60% ofyour wealth is allocated to the risk free asset, and the rest to the market portfolio. The correctanswer is(

a) mean of 14.37% and standard deviation of 3.266%.

(b) mean of 14.37% and standard deviation of 2.568%.

(c) mean of 13.88% and standard deviation of .7756%.

(d) mean of 18.32% and standard deviation of 1.164%.(e) mean of 23.92% and standard deviation of 3.656%.