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You are given the following information about the beta coefficient, returns as expected by your brokerage firm, the expected return of the market and the
You are given the following information about the beta coefficient, returns as expected by your brokerage firm, the expected return of the market and the amount you should allocate to each stock. E(RM)=20% and the risk-free rate is 4%. (Select all correct answers below and show your calculation on your exam paper). 1. Calculate the equilibrium rate of return E(R) of each stock according to the CAPM. 2. Based on your broker's prediction, explain which stock is underpriced and which stock is overpriced. What is your buy and sell decision? 3. Calculate the beta of the portfolio invested in these 4 stocks 4. Calculate the expected return of the portfolio invested in these 4 stocks Stock A B Investment $400,000 $600,000 $500,000 $700,000 Beta 1.5 -0.5 1.25 Broker's expectation 25% 2% 22% 18% D 0.75
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