Your analysis shown that a stock with a beta of 1.5 will have a return of 20% over the next year. A risk-free asset currently earns 4%, and the market portfolio currently earns 10%.

a) Based on your analysis, is this stock currently overpriced, underpriced, or correctly priced? Does it lie above, below, or on the Security Market Line (SML)? Explain. (6 marks)

b) Based on your analysis, what is the expected return on a portfolio that is equally invested in the stock and the risk-free asset? What is its beta? (4 marks)

c) Based on your analysis, if a portfolio of the stock and the risk-free asset has a beta equal to the beta of the market portfolio, what are this portfolio, what are this portfolio’s weights?

d) Based on your analysis, if a portfolio of the stock and risk-free asset has on expected return of 10%, what is the beta of this portfolio? (4 marks)

Answer rating: 100% (QA)

a Expected return of the stock Risk free rate Beta of stock Market return Risk free ... View the full answer