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I WILL LIKE FOR FAST REPLY Returns and associated information of 3 stocks, X, Y, and Z are given as follows. Column (B) in the
I WILL LIKE FOR FAST REPLY Returns and associated information of 3 stocks, X, Y, and Z are given as follows. Column (B) in the table below shows the expected returns generally agreed among investors in the market. The standard deviation of returns for the market portfolio is 0.085. (Show 3 decimal places in all calculations) Stock (A) Expected Standard Return (B) Deviation (C) Correlation with Market Portfolio Returns (D) Beta Required Return (E) by CAPM (F) -0.350 X Y Z 0.130 0.200 0.105 0.120 0.240 0.160 -0.250 0.750 0.300 0.229 0.560 A. Based on the information given above, complete Column (E) by computing the beta of Stock Y and filling out the blank cell. (2 marks) B. The market portfolio return is 0.14 and the risk-free rate is 0.06. Complete Column (F) by computing the required returns based on the capital asset pricing model (CAPM) and filling out the 2b blank cells. (3 marks) C. Based on the answers to 1) and 2) above, which stock is priced correctly? Which stock is under- priced (and thus attractive to buy)? Briefly explain why in each question. (3 marks) D. Suppose you have a well-diversified portfolio which includes all the above 3 stocks. Which of the 3 stocks would you consider the riskiest? Why do you think so? (3 marks) E. Now you plan to invest 60% of your funds in Stock X and 40% in Stock Y. The correlation coefficient of the 2 stock returns is -0.32. Compute the expected return and standard deviation of your portfolio
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