Assume the market portfolio consists only of three stocks as follows: Stock Emperor King Sultan Current...

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Assume the market portfolio consists only of three stocks as follows: Stock Emperor King Sultan Current Market Share Price $50 $25 $6.25 # Shares Outstanding (in millions) 200 500 400 Market capitalization (in millions $) ? ? ? ? Weight Beta ? ? ? The last column shows the expected return over the next year. Given above information, answer the following questions: a) Calculate the market capitalization for each stock and their weights [4 points] b) Calculate the beta of the market portfolio. [2 points] 0.3 1.6 0.8 E(R) 6.6% 22.2% 12.6% c) What is the expected return on the market portfolio? [2 points] d) Determine the risk free rate. [Hint: you can use any stock and its associated beta to obtain Ry, from the market equilibrium condition of the SML]. [4 points] e) Based on your results above, compute the expected return on stock King using the CAPM. [2 points] f) Petra Smart, a successful investment analyst with an impressive record, estimates that King stock will reach a price of $40 over the next year, which is based on her analysis of the firm's fundamentals (e.g., analysis of financial ratios, risk, capital expenditures, macroeconomic indicators, and others). King stock does not pay dividends. Based on this information: fl) Estimate the expected holding period return on King Stock. [2 points] f2) Would you invest in King stock? Yes, no, justify your answer. [2 points] f3) Is King stock underpriced, overpriced or fairly priced? Justify quantitatively by computing the fair value of the stock. [2 points] f4) Explain an investment strategy (if any) to profit from Petra's prediction. [2 points] Assume the market portfolio consists only of three stocks as follows: Stock Emperor King Sultan Current Market Share Price $50 $25 $6.25 # Shares Outstanding (in millions) 200 500 400 Market capitalization (in millions $) ? ? ? ? Weight Beta ? ? ? The last column shows the expected return over the next year. Given above information, answer the following questions: a) Calculate the market capitalization for each stock and their weights [4 points] b) Calculate the beta of the market portfolio. [2 points] 0.3 1.6 0.8 E(R) 6.6% 22.2% 12.6% c) What is the expected return on the market portfolio? [2 points] d) Determine the risk free rate. [Hint: you can use any stock and its associated beta to obtain Ry, from the market equilibrium condition of the SML]. [4 points] e) Based on your results above, compute the expected return on stock King using the CAPM. [2 points] f) Petra Smart, a successful investment analyst with an impressive record, estimates that King stock will reach a price of $40 over the next year, which is based on her analysis of the firm's fundamentals (e.g., analysis of financial ratios, risk, capital expenditures, macroeconomic indicators, and others). King stock does not pay dividends. Based on this information: fl) Estimate the expected holding period return on King Stock. [2 points] f2) Would you invest in King stock? Yes, no, justify your answer. [2 points] f3) Is King stock underpriced, overpriced or fairly priced? Justify quantitatively by computing the fair value of the stock. [2 points] f4) Explain an investment strategy (if any) to profit from Petra's prediction. [2 points]

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a To calculate the market capitalization and weights for each stock 1 Emperor Market capitalization Current Market Share Price Shares Outstanding Mark... View the full answer