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Keith holds a portfolio that is invested equally in three stocks (w_O = w_A = w = 1/3). Each stock is described in the following
Keith holds a portfolio that is invested equally in three stocks (w_O = w_A = w = 1/3). Each stock is described in the following table: An analyst has used market- and firm-specific information to make expected return estimates for each stock. The analyst's expected return estimates may or may not equal the stocks required returns. The risk-free rate [r_RF] is 6%, and market risk premium (RP_M) is 4%. Use the following graph with the security the market line (SML) to plot each stock's beta and expected return. Tool tip: Mouse over the points on the graph to see their coordinates. A stock is in equilibrium if is required return equals its expected return. In general, assume that markets and stock are in equilibrium (or fairly valued), but sometimes investors have different opinions about a stock's prospects and may think that a stock is out of equilibrium (either undervalued or overvalued). Use the analyst's expected return estimates to determine if this analyst thinks that each stock in Keith's portfolio is undervalued, overvalued, or fairly valued
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