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Security Expected Return Standard Deviation Correlation* Beta Firm A .10 .31 (i) .85 Firm B .14 (ii) .50 1.40 Firm C .16 .65 .35 (iii)

Security

Expected Return

Standard Deviation

Correlation*

Beta

Firm A

.10

.31

(i)

.85

Firm B

.14

(ii)

.50

1.40

Firm C

.16

.65

.35

(iii)

The Market Portfolio

.12

.20

(iv)

(v)

The Risk-Free Asset

.05

(vi)

(vii)

(viii)

*With the market portfolio

Is the stock of Firm A correctly priced according to the capital asset pricing model (CAPM)? What about the stock of Firm B? Firm C? If these securities are not correctly priced, what is your investment recommendation for someone with a well-diversified portfolio?

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