Suppose three stocks A, B and C, the market portfolio and the risk-free asset with the following characteristics:

	Return	Sigma	Correlation with the market portfolio	Beta
Rf	0.03	(a)	(b)	(c)
Market	0.12	0.25	(d)	(e)
A		0.2	0.3	(f)
B		0.6	(g)	1.1
C		(h)	0.8	1.4

1. Fill in the table above and justify each answer with the appropriate formula (use the reference letter for each calculation and justify your answer for each calculation).
2. How can you interpret the beta? What can you say about stock A and Cs beta?
3. What is the expected return of stock A, B and C according to the CAPM? (Justify your answer for each calculation.)
4. Draw a graph of the Securities Market Line (SML), and plot the risk free rate (rf), the market (M), Stock A, B and C on this graph. The graph doesnt need to be to scale, but if you draw the axes 10 cm x 10 cm it should give you enough space for part 4 and 5 of this question
5. You have done your own independent analysis of stocks A and C. Based on this analysis, you expect to earn a return of 9% on Stock A, and 12.9% on Stock C. Based on the SML from part (4) and your own independent analysis, do you think stocks A and C are correctly priced by the market? If not, do you think they are overpriced or underpriced? Calculate alpha for stocks A and C, and state whether you would buy, sell or are indifferent for each of them.

Suppose three stocks A, B and C, the market portfolio and the risk-free asset with the following characteristics: Return Sigma Correlation with the market portfolio Beta Rf 0.03 (a) (b) (c) Market 0.12 0.25 (d) (e) A 0.2 0.3 (f) B 0.6 1.1 (h) 0.8 1.4 1. Fill in the table above and justify each answer with the appropriate formula (use the reference letter for each calculation and justify your answer for each calculation). 2. How can you interpret the beta? What can you say about stock A and C's beta? 3. What is the expected return of stock A, B and C according to the CAPM? (Justify your answer for each calculation.) 4. Draw a graph of the Securities Market Line (SML), and plot the risk free rate (rf), the market (M), Stock A, B and C on this graph. The graph doesn't need to be to scale, but if you draw the axes 10 cm x 10 cm it should give you enough space for part 4 and 5 of this question 5. You have done your own independent analysis of stocks A and C. Based on this analysis, you expect to earn a return of 9% on Stock A, and 12.9% on Stock C. Based on the SML from part (4) and your own independent analysis, do you think stocks A and C are correctly priced by the market? If not, do you think they are overpriced or underpriced? Calculate alpha for stocks A and C, and state whether you would buy, sell or are indifferent for each of them. Suppose three stocks A, B and C, the market portfolio and the risk-free asset with the following characteristics: Return Sigma Correlation with the market portfolio Beta Rf 0.03 (a) (b) (c) Market 0.12 0.25 (d) (e) A 0.2 0.3 (f) B 0.6 1.1 (h) 0.8 1.4 1. Fill in the table above and justify each answer with the appropriate formula (use the reference letter for each calculation and justify your answer for each calculation). 2. How can you interpret the beta? What can you say about stock A and C's beta? 3. What is the expected return of stock A, B and C according to the CAPM? (Justify your answer for each calculation.) 4. Draw a graph of the Securities Market Line (SML), and plot the risk free rate (rf), the market (M), Stock A, B and C on this graph. The graph doesn't need to be to scale, but if you draw the axes 10 cm x 10 cm it should give you enough space for part 4 and 5 of this question 5. You have done your own independent analysis of stocks A and C. Based on this analysis, you expect to earn a return of 9% on Stock A, and 12.9% on Stock C. Based on the SML from part (4) and your own independent analysis, do you think stocks A and C are correctly priced by the market? If not, do you think they are overpriced or underpriced? Calculate alpha for stocks A and C, and state whether you would buy, sell or are indifferent for each of them