Economic Condition (probability) Stock A (40% of portfolio) Stock B (60% of portfolio) Recession (.15) + 0.0% - 25.0% + 15.0% Normal (.70) + 12.0% Boom (.15) + 20.0% + 45.0% a) Assuming a 5% risk free rate, a Beta of 0.9 for company A, and a Beta of 1.5 for company B, which company (above) offers the best market-risk adjusted return? b) If the required rate of return on the market portfolio is 10% and the market is efficient, is the above portfolio (40% A, 60% B) over-, under-, or fairly-priced? |