Risk, Return and Investment Decisions Investment decisions are supported by various factors including investor choice of risk appetite, return on investment and most important the market situation that is backed by supply and demand forces. The supply and demand impact is reflected in the market price of securities and guide investors to take a rational decision. Along with market forces, company specific information is also helpful in determining the fair price of an investment. Rational investors consider both market and company specific information to choose among different investment options. Following information is available for the three stock and you have to choose the two from the three securities to construct a portfolio. Particulars Stock A Stock B Stock C Market rate of return 12% 13% 12.5% Beta 0.5 1.5 1 Expected dividend for the next year Rs. 5 per share Rs. 3 per share Rs. 6 per share Constant growth rate of dividend 4% 6% 2% Market price Rs. 60 Rs. 56 Rs. 47 Required: Calculate required rate of return for three stock using SML Equation, if risk free rate of return is 10%. Calculate Fair value of three stocks using Gordon Growth Model. Based on fair price calculation, identify whether the stocks are undervalued or overvalued, justify your answer with reasoning. Considering the above calculations, if you want to construct the portfolio of two stock from the above mentioned three stock., which two stocks you will add in your portfolio and why?