From the following market data:

Mth Returns	Market	Stock 1	Stock 2
1	0.05	0.13	0.09
2	0.04	0.11	0.09
3	0.03	0.05	0.08
4	0.03	0.02	0.06
5	0.045	0.07	0.06
6	0.06	0.12	0.07
7	0.07	0.14	0.08
8	0.09	0.17	0.09

Calculate the Beta of each stock. Q.1 Stock 1 Beta = multiple choice: 0.15 / 2.15 / 1.15

Q.2 Stock 2 Beta = multiple choice: 0.25 / 0.85 / 0.52

Q.3 Which stock is more sensitive to market risk?

The Rf = 2% and the return of the ASX200 = 10%. The ASX200 is a share index that can be used to proxy the return of the market.

Q.4 The E(R) of stock 1 is = multiple choice: 17.17% / 21.17% / 19.17%

Q.5 The E(R) of stock 2 is = multiple choice: 2.97% / 1.97% /3.97%

Q.6

A market analyst estimates that the E(r) for Stock 1 as 21% and Stock 1 as 1%.

Comparing these to the appropriate CAPM E(r), the market analyst return estimates will lead to (under-pricing/over-pricing)..of Stock 1 and ..(under-pricing / over-pricing).. of Stock 2.

This is because the E(r) is used as the discount rate to value the cash flows of the stock and using a discount rate that is too (..high/low) will result in underpricing while one that is too (low/high.)will lead to overpricing.