The risk free rate is 10% and the expected return on the market portfolio is 15%. The expected returns for 4 securities are listed below together with their expected betas

SECURITY EXPECTED RETURN EXPECTED BETA

A 17.0% 1.3

B 14.5% 0.8

C 15.5% 1.1

D 18.0% 1.7

REQUIRED:

a. On the basis of these expectations, which securities are overvalued? Which are undervalued?

b. If the risk-free rate were to rise to 12% and the expected return on the market portfolio rose to 16%, which securities would be overvalued? which would be under-valued? (Assume the expected returns and the betas remain the same).