You are considering the following three stocks as an investment: Risk-free rate 3% Market risk premium 5% (a) What is the return of the market portfolio? (2 marks) (b) Using the Capital Asset Pricing Model, calculate the rate of return of each stock. (6 marks) (c) Based on your finding in a), which stock is under-priced, correctly priced or overpriced? (4 marks) (d) Which of the three firms has the highest systematic risk? Explain how you came up with your answer. (4 marks) (e) What happens to the required return of each stock if the risk-free rate would be cut in half? Use your own words to explain why this happens. (4 marks)

You are considering the following three stocks as an investment Adelaide Brisbane Canberra Aluminium Brass Copper 10% 17% 9% 1.2 2.4 0.7 Forecast return Beta Risk-free rate Market risk premium 3% 5% (a) What is the return of the market portfolio? (2 marks) (b) Using the Capital Asset Pricing Model, calculate the rate of return of each stock. (6 marks) (c) Based on your finding in a), which stock is under-priced, correctly priced or overpriced? (4 marks) (d) Which of the three firms has the highest systematic risk? Explain how you came up with your answer. (4 marks) (e) What happens to the required return of each stock if the risk-free rate would be cut in half? Use your own words to explain why this happens. (4 marks)