You have observed the following returns over time:

Assume that the risk-free rate is 4%, the market risk premium is 5%, the beta for Stock X is 1.50, and the beta for StockY is 0.46:

a. What are the required rates of return for Stocks X and Y?

b. What is the required rate of return for a portfolio consisting of 40% of Stock X and 60% of StockY?

c. If Stock X's expected return is 13%, is Stock X under- or overvalued?

Stock X Stock Y Market Year 13% 2011 14% 12% 2012 19 10 2013 -16 -5 -12 2014 3 1 2015 20 11 15