You are considering forming a portfolio with two stocks. Stock Y has a beta of 1.50, an expected return of 17% and a standard deviation of 30%. Stock Z has a beta of 0.80, an expected return of 10.5% and a standard deviation of 20%. The correlation between returns of stock Y and stock Z is 0.5. The risk-free rate is 5.5% and the market risk premium is 7.5%.

Required: 1) If you form an equally weighted portfolio with stock Y and stock Z, what is the expected return for your portfolio? (3 Marks)

2) What are the beta and the standard deviation of your equally-weighted portfolio? (6 Marks)

3) Are the two stocks correctly priced? Why or why not? (6 Marks)