Suppose you have data that show the rates of return earned by Stock X, Stock Y, and the market over the last 5 years, along with the risk-free rate of return and the required return on the market. You also have estimates of the expected returns on X and Y.

How could you decide, based on these expected returns, if Stocks X and Y are good deals, bad deals, or in equilibrium?

Now suppose in Year 6 the market is quite strong. Stock X has a high positive return, but Stock Ys price falls because investors suddenly become quite concerned about its future prospects; that is, it becomes riskier, and like a bond that suddenly becomes risky, its price falls. Based on the CAPM and using the most recent 5 years of data, would Stock Ys required return as calculated just after the end of Year 6 rise or fall? What can you say about these results?