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Lecture - 4 - Risk and Return - Practice Questions 1. From the following information: Security Alavested Expected Returns (5) Beta FA 2.100 0.65 Equity

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Lecture - 4 - Risk and Return - Practice Questions 1. From the following information: Security Alavested Expected Returns (5) Beta FA 2.100 0.65 Equity 1.100 6.300 DO 10.94 120 Equy EX300 You are required to calculate A. Expected returns of the portfolio? B. Beta of the portfolio? C. Comments on the calculated values? 2. The following information describes betas for stock X, Y and the market index, which are estimated from the last year. Rotem Curl price Reta (14 Market Index 110 Riko ON a. Use the CAPM to determine the future prices for stock X and Y in the next year and assume no dividends payouts b. It is expected that there are dividends for Stock X = 3 and Stock Y = 4 before the end of the next year. What are the future prices (i.c. one-year from now) for X and Y. c. Financial analysts now forecast X and Y future prices (i.e one-year from now) at 14 and 18 respectively (no dividend payout during the year). If you firmly believe their forecasting, which stock is currently undervalued or overvalued (Hint: you can calculate whether estimated returns are below or above the SML)? What action should you take towards two stocks? d. Can you discuss why the financial analysts forecasting prices (12 and 16) will be different from your own calculations in (a)

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