Stock Y has a beta of 1.60 and an expected return of 16%. If the risk-free rate is 3% and the market risk premium (expected market return minus risk-free rate) is 6%, is this stock undervalued or overvalued according to the CAPM (or SML)? Why or why not?

(Use the following data to answer the next two questions.)

A newly developed fund has total capital of $300 million invested in three stocks: Stock, Investment, Stocks Beta, A $150 million 1.0, B 80 million 0.8, C 70 million 0.5

The current risk-free rate is 4 percent, whereas market returns have the following estimated probability distribution for the next period: Probability Market Return 0.1 10%, 0.2 12%, 0.4 13%, 0.2 16%, 0.1 22%

24. Compute the funds required rate of return for the next period.

25. The manager of the fund found an investment opportunity. The beta coefficient of the investment opportunity is 1.5 and its expected return is 17.5%. According to the CAPM, should the manager invest in that opportunity? Why or why not?