You have been provided the following data on the securities of three firms, the market portfolio, and

Question:

You have been provided the following data on the securities of three firms, the market portfolio, and the risk-free asset:

EXPECTED RETURN STANDARD DEVIATION SECURITY CORRELATION BETA .11 .14 .36 (i) .42 () .38 Firm A Firm B Firm C .85 1.35 .5

a. Fill in the missing values in the table.
b. Is the stock of Firm A correctly priced according to the capital asset pricing model (CAPM)? What about the stock of Firm B? Firm C? If these securities are not correctly priced, what is your investment recommendation for someone with a well-diversified portfolio?

Capital Asset Pricing Model
The Capital Asset Pricing Model (CAPM) describes the relationship between systematic risk and expected return for assets, particularly stocks. The CAPM is a model for pricing an individual security or portfolio. For individual securities, we make use of the security market line (SML) and its...