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We have the following information for COMa and BB stocks and the economy. The risk-free rate, r rf , is 2% and the required return
We have the following information for COMa and BB stocks and the economy. The risk-free rate, rrf, is 2% and the required return on the market, rm, is 8%. Following are the betas of each of the stocks:
Stock | Beta | Expected Return |
COMa | 1.1 | 8% |
BB | 1.25 | 10% |
What are the required returns on each of the stocks (using CAPM) and a portfolio consisting of 70% in COMa and 30% in BB?
If these expected returns are the annualized average historical returns of the past year, are COMa, BB! and the portfolio over or under (or correctly) priced? Explain.
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