Question 3: (15 points)

Consider the CEO of the Financial Institution Omega who is employing the Capital Asset Pricing Model (CAPM) and the Table below in order to obtain financial unbiased estimates of the following financial variables.

YEAR STOCK X STOCK Y MARKET

2015 18% 16% 22%

2016 21% 17% 19%

2017 -6% - 9% - 2%

2018 13% 11% 21%

2019 20% 26% 35%

Assume that the Risk-Free rate is 3% and the Average or Expected Returns on Stock X is 13.2%, Y is 12.2% and M is 19% respectively.

Assist him to calculate the following relationships.

1. What are the betas of stock X and Y respectively?
2. Are stocks X and Y aggressive or defensive stocks?
3. What is the slope of the Security Market Line?
4. What is the slope of the Capital Market Line?
5. What are the required rates of return for Stocks X and Y respectively?
6. Are Stocks X and Y Overvalued or Undervalued?
7. What do we mean by the term Efficient Frontier?