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Q1. Consider a portfolio consisting of the following three stocks. The standard deviation of the market portfolio is 10%. The expected return of the market
Q1. Consider a portfolio consisting of the following three stocks. The standard deviation of the market portfolio is 10%. The expected return of the market portfolio is 8%. The risk-free asset is 3%. a. What is the beta and expected return of each stock? b. What is the expected return of the portfolio? c. What is the beta of the portfolio? HINT: i=2(rM)cov(ri,rM) Since corr(ri,rM)=(ri)(rM)cov(ri,rM)cov(ri,rM)=corr(ri,rM)(ri)(rM) Therefore, i=2(rM)cov(ri,rM)=2(rM)corr(ri,rM)(ri)(rM)=(rM)corr(ri,rM)(ri) Q2. The actual return of the asset is 10%. However, based on its beta, the CAPM estimates its required return as 8%. Is the asset overpriced or underpriced? Explain your answer. You may simply draw the graph that explains your
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