Problem 2 You learn the following information from a financial analyst who has been following these three stocks: Table 4.22 Stock Pear Stock Banana Stock Orange Expected Return 12% 8% 9% Beta 1.52 1.22 0.74 You also learn that the risk-free rate is 1%, and the expected market return is 9% per year. 4 i. Which stock has the highest risk? Why? a. Stock Pear because it has the highest beta; 4 b. Stock Banana because it has the lowest expected return; c. Stock Orange because it has the lowest beta; 4 d. All stocks have the same risk because the idiosyncratic risk is diversifiable. + 11. If the analyst is right, which stock(s) is/are underpriced? ii. Based on your analysis in (ii), which stock(s) should you buy? Which stock(s) should you sell or short sell