QUESTION FIVE (10 POINTS)

1. Based on five years of monthly data, you derive the following information for the companies listed:

Company	(Intercept)	i	ri M	COV	Beta
Intel	0.22	12.10%	0.72	0.00479	1.97
Ford	0.10	14.60	0.33	0.00265	0.883
Busch	0.17	7.60	0.55	0.00230	0.767
Merck	0.05	10.20	0.60	0.00337	1.123
S&P 500	0.00	5.50	1.00

Required:

(1) Assuming a risk-free rate of 8 percent and an expected return for the market portfolio of 15 percent, compute the expected (required) return for all the stocks

(2) Plot the following estimated returns for the next year on the SML and indicate which stocks are undervalued or overvalued.

Intel20 percent

Ford15 percent

Busch19 percent

Merck10 percent