Question
You arrive late for class and all you see on the board is the following table, with some missing information (cells with a question mark).
You arrive late for class and all you see on the board is the following table, with some missing information (cells with a question mark).
| Asset | CAPM Return | Beta | Correlation with the market | Volatility |
| A | 10% | 0.8 | ? | 50% |
| B | 14% | ? | .75 | > |
| Risk-Free Asset | ? | 0 | 0 | 0 |
| Market Portfolio | 11.75% | ?1 | 1 | 20% |
Fill in the missing information, that is, compute the correlation with the market for stock A, the beta and volatility for stock B, the risk-free rate and the beta of the market portfolio.
Suppose you learn that stock B has an expected return of 13.5%. Is this stock correctly priced, underpriced or overpriced? Briefly justify your answer.
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Fundamentals of corporate finance
Authors: Stephen Ross, Randolph Westerfield, Bradford Jordan
10th edition
978-1260013955, 78034639, 978-0078034633
