You know the following information about possible returns offered by two stocks, Umbrella and Resorts, next year. Scenario Probability Return (X) Return (Y) Rainy season 0.3 30% -10% Sunny season 0.7 -20% 40%

Scenario: Rainy season

Probability : 0.3

Return (X) : 30%

Return (Y): -10%

Scenario: Sunny season

Probability: 0.7

Return (X): -20%

Return (Y): 40%

Suppose the yield on short-term government securities (perceived to be risk-free) is about 4%. Suppose also that the expected return required by the market for a portfolio with a beta of 1 is 8.0%. Suppose you consider buying a share of stock at a price of $100. The stock is expected to pay a dividend of $2 next year and to sell then for $105. The stock risk has been evaluated at = 1.5. Is the stock underpriced, fairly priced, or overpriced? Should you buy, sell, or hold the stock? Show detailed calculations leading to your answers.