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Use the following data to answer the following questions : Economy Probability Sheldons Train Emporium (STE) Recession 0.20 4.0% Average 0.50 12.0 Boom 0.30 30.0

Use the following data to answer the following questions :

Economy Probability Sheldons Train Emporium (STE) Recession 0.20 4.0% Average 0.50 12.0 Boom 0.30 30.0 Beta 1.10

a. Calculate the expected return for STE?

b. Calculate the standard deviation of returns for STE. What does the standard deviation measure?

c. If the current risk-free rate is 2.50% and the market risk premium is 5.0%, what is STEs. required rate of return?

d. Is STE under- or over-valued? Hint: Compare your answers to a. and c.

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