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Q3) Consider the following table, which gives a security analyst's expected return on two stocks in two particular scenarios for the rate of return on
Q3) Consider the following table, which gives a security analyst's expected return on two stocks in two particular scenarios for the rate of return on the market: Scenarios 1 2 Market Return 5% 25 % Aggressive Stock -2% 38% Defensive Stock 6% 12% a) What are the betas of the two stocks? (5 points) b) Plot the two securities on the SML graph. Assume that T-bill rate is 6%. (5 points) c) What are the alphas of each? (5 points) Q4) You are considering investing in stock S and you want to know how stock S is related to the market portfolio M. Given your research, you discovered the following information: Expected Return Standard Deviation Stock (s) 15% 25% Market (M) 12% 20% Risk-free 2% Correlation of S and M 40% a) What is the exposure of stock S to market risk? (3 points) b) Discuss whether according to the CAPM, stock S is overvalued, undervalued or fairly valued. (2 points) c) What is the level of systematic and idiosyncratic risk for stock S? (5 points)
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