Cristiane Kreitler plans to invest in a portfolio made up of just two stocks - A and B. The beta of stock A is 0.6 and the beta of stock B is 1.2. The risk-free rate is 3% and the market risk premium is estimated to be 7%.

 

a. What is the required rate of return on a portfolio consisting of 50% invested in stock A and 50% invested in stock B?

 

b. Security analysts are projecting an expected return of 11% on this portfolio, with a standard deviation of 3%. What is the probability that this portfolio is currently undervalued in the marketplace?