Question
Currently the risk-free rate equals 5% and the expected return on the market portfolio equals 11%. An investment analyst provides you with the following information:
Currently the risk-free rate equals 5% and the expected return on the market portfolio equals 11%. An investment analyst provides you with the following information:
Stock A Beta 1.33 Expected Return 12%
Stock B Beta 0.7 Expected Return 10%
(a) Calculate the reward-to-risk ratios of stock A, stock B and in market equilibrium. Are stock A and stock B overvalued, undervalued or fairly valued? Briefly explain. [within 150 words]
(b) You want a portfolio with the same risk as the market. Calculate the weights of stock A and B respectively.
(please show me steps and round the final answer to 2 decimal places, thanks)
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started