You have observed the following returns over time: Year Stock A Stock B Market 1997 14.000% 15.000% 12.000% 1998 11.000% 9.000% 10.000% Assume the risk-free rate is 3.55% and the market risk premium is 4.60%. INPUT DATA IRF 3.55% Market Risk Premium 4.60% a. What are the betas of Stocks A and B? BA BB 1999 2000 2001 -2.500% 14.000% 20.000% 5.000% 7.500% 13.500% 3.000% 4.000% 19.000% b. What are the required rates of return for Stocks A and B? rA 2002 2003 2004 21.500% 22.400% 19.900% 14.000% 13.500% 14.400% 24.000% 21.000% 15.000% c. What is the required rate of return for a portfolio consisting of 40% A and 60% INPUT DATA WA 40.00% 2005 2006 2007 12.000% 18.000% 16.000% 17.000% 2008 2009 19.000% d. Stock A is trading at a price consistent with the security market line. If your analysis suggests that Stock A will provide a return above the SML, does your analysis suggest that Stock A is undervalued or overvalued? Explain. 2010 21.100% 24.000% 26.300% 25.500% 22.100% 13.500% 6.400% -1.100% -4.000% 6.500% 7.400% 9.900% 16.700% 18.800% 19.700% 21.100% 23.400% 11.500% 8.800% 4.200% 5.600% 6.800% 8.700% 9.900% 2011 18.000% 9.000% -3.000% -2.500% 2012 2013 2014 2015 2016 4.000% 9.000% 12.000% You have observed the following returns over time: Year Stock A Stock B Market 1997 14.000% 15.000% 12.000% 1998 11.000% 9.000% 10.000% Assume the risk-free rate is 3.55% and the market risk premium is 4.60%. INPUT DATA IRF 3.55% Market Risk Premium 4.60% a. What are the betas of Stocks A and B? BA BB 1999 2000 2001 -2.500% 14.000% 20.000% 5.000% 7.500% 13.500% 3.000% 4.000% 19.000% b. What are the required rates of return for Stocks A and B? rA 2002 2003 2004 21.500% 22.400% 19.900% 14.000% 13.500% 14.400% 24.000% 21.000% 15.000% c. What is the required rate of return for a portfolio consisting of 40% A and 60% INPUT DATA WA 40.00% 2005 2006 2007 12.000% 18.000% 16.000% 17.000% 2008 2009 19.000% d. Stock A is trading at a price consistent with the security market line. If your analysis suggests that Stock A will provide a return above the SML, does your analysis suggest that Stock A is undervalued or overvalued? Explain. 2010 21.100% 24.000% 26.300% 25.500% 22.100% 13.500% 6.400% -1.100% -4.000% 6.500% 7.400% 9.900% 16.700% 18.800% 19.700% 21.100% 23.400% 11.500% 8.800% 4.200% 5.600% 6.800% 8.700% 9.900% 2011 18.000% 9.000% -3.000% -2.500% 2012 2013 2014 2015 2016 4.000% 9.000% 12.000%