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You are a portfolio manager at Collins Asset Management. Your research department has developed the information shown in the following table. Estimated expected return Standard
You are a portfolio manager at Collins Asset Management. Your research department has developed the information shown in the following table.
| Estimated expected return | Standard deviation | Correlation with market portfolio |
Stock X | 8.8% | 18.46% | 0.3 |
Stock Y | 6.3% | 11.75% | 0.7 |
Market index | 8.5% | 13% | 1 |
T-bills | 3% | 0 | 0 |
- Estimate the beta for X and Y. (3 marks)
- If the CAPM holds true for both X and Y, what are their required returns? (3 marks)
- Identify and justify which stock (stock X or Y) would be more appropriate for an investor who wants to add the stock to a well-diversified equity portfolio. (5 marks)
- Estimate the required rate of return for a portfolio formed with 70% of wealth invested in X and 30% invested in Y, and determine if it is undervalued or overvalued. (5 marks)
- If you want to hold stock X or Y as a single-stock portfolio, which one should you choose? (4 marks)
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