Question 4

You have following investments in securities A, B and C.

The current risk-free rate of interest is 7% and you have heard that analysts are expecting a 15% return on the market portfolio over the next year. Based on your expectations for the 1-year returns of each of the securities is your portfolio under-priced, overpriced or correctly priced? (show your workings and explain your reasoning)

Security Amount Invested Beta A B C 25,000 30,000 45,000 1.2 1.6 2.0 Expected 1 Year Return 15% 20% 25%