Consider data in the table below. Portfolio or Stock

E(ri) i i

W 17.2% 18% 1.20

X 4.0% 0%

Y 24% 0.80

Z 15.0% 20% 1.00

Note: E(ri) is the expected and required rate of return according to the CAPM.

(a) Write down the general SML equation (e.g., E[ri] = 5% + 10%i).

(b) What is the required rate of return on stock Y according to the CAPM?

c) An investor uses the CAPM to value financial assets. He estimates that the expected rate of return on stock W is 20.0%. Should he buy stock W because it is currently underpriced?

(d) (Optional) Portfolio D is a combination of stocks W and Y with the weights of W:Y = 3:2. What is the required rate of return on D according to the CAPM?