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The expected return for the market is 12%, and the risk-free rate is 4%. The following information is available for each of the five stocks.
The expected return for the market is 12%, and the risk-free rate is 4%. The following information is available for each of the five stocks. Stock 1 2 3 4 5 Beta 0.9 1.3 0.5 1.1 Estimated Return (%) 12 13 11 12.5 12 1.0 a. Calculate the required rates of return for each stock. [5] b. Assume that an investor, using fundamental analysis, develops the estimates of expected returns for these stocks which are given in the table above. On the basis of these estimated returns and required returns, and determine which stocks are undervalued and which are overvalued. [3] c. What is the market's risk premium? [2]
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