QUESTION 3 (14 marks) George is the Chief Investment Officer of FinMgt Ltd., a portfolio management consulting firm. When advising clients, George employs the Capital Asset Pricing Model (CAPM) for individual stock selection. George's team is evaluating two stocks, Red Flower Co. and Green Leaf Co. for possible inclusion in the FinMgt Ltd.'s actively managed portfolio. Table 1 summarizes their forecasts for the two stocks and for the well diversified passive market index. The risk-free rate equals 5 percent. Table 1: FinMgt Forecasts Forecast Return Beta Red Flower Co. 21% 1.50 Green Leaf Co. 11% 0.80 Passive market Index 15% 1.00 (a) From the data provided, what is the CAPM required return for Red Flower Co. and Green Leaf (4 marks) Co.? (b) From part (a) and the data provided, explain whether Red Flower Co. is underpriced or overpriced and by how much in terms of return? (3 marks) (c) From part (a) and the data provided, explain whether Green Leaf Co. is underpriced or overpriced and by how much in terms of return? (3 marks) (d) From your answers in (a), (b) and (c) above, what investment strategy for Red Flower and Green Leaf should FigMgt recommend to its clients? (4 marks)