4. You are given the following information about two stocks, the market index and the risk...

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4. You are given the following information about two stocks, the market index and the risk free rate. The forecasted returns are based on your own research and are not the expected returns based on CAPM. Stocks IBM CSCO Market Risk-free Forecasted Return 14% 19% 14% 5% Standard Deviation 36% 25% 15% Beta 0.8 1.5 (a) Assume the forecasted market return is the true expected market return. Cal- culate the expected return for each stock based on the CAPM model. (b) If your forecasted returns are correct, are these stocks over or undervalued based on the CAPM model? Why? 4. You are given the following information about two stocks, the market index and the risk free rate. The forecasted returns are based on your own research and are not the expected returns based on CAPM. Stocks IBM CSCO Market Risk-free Forecasted Return 14% 19% 14% 5% Standard Deviation 36% 25% 15% Beta 0.8 1.5 (a) Assume the forecasted market return is the true expected market return. Cal- culate the expected return for each stock based on the CAPM model. (b) If your forecasted returns are correct, are these stocks over or undervalued based on the CAPM model? Why?

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