Currently the risk free rate equals 5% and the expected rate of return on the market portfolio equals 11%. An investment analyst you with the following information

• Stock Beta Expected Returns
• W 1.33 12%
• X 0.7 10%
• Y 1.6 14%
• Z 0.77 9%

Required:

1. Indicate whether each stock is overpriced, under-priced, or correctlypriced
2. For each stock, subtract the risk-free rate from the stock's expected return and divide the result by the stock's beta. For example, for asset W this calculation is (12%-5%) divided by 1.33. Provide an interpretation for these ratios, Which stock has highest ratio and which has the lowest?
3. Show how a smart investor could construct a portfolio of stock Y and Z that would outperform stock W.
4. Construct a portfolio consisting of some combination of market portfolio and the risk-free asset such that the portfolio's expected return equals 9%. What is the beta of this portfolio? What does this say about stock Z?