Consider the following 2-stock portfolio: Stock Investment Beta Amount Standard Deviation Expected Return X $100,000 1.2...

 

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Consider the following 2-stock portfolio: Stock Investment Beta Amount Standard Deviation Expected Return X $100,000 1.2 10% 20% Y $60,000 0.8 25% 12% Assume that the risk-free rate is 5 percent and the expected return on the market portfolio is 15 percent. a) Using the CAPM or SML equation, compute the required rate of return of stock X and stock Y. b) Are these stocks overpriced or underpriced? Briefly explain. c) Which stock has higher total risk? Why? (4 marks) (6 marks) (2 marks) Act Consider the following 2-stock portfolio: Stock Investment Beta Amount Standard Deviation Expected Return X $100,000 1.2 10% 20% Y $60,000 0.8 25% 12% Assume that the risk-free rate is 5 percent and the expected return on the market portfolio is 15 percent. a) Using the CAPM or SML equation, compute the required rate of return of stock X and stock Y. b) Are these stocks overpriced or underpriced? Briefly explain. c) Which stock has higher total risk? Why? (4 marks) (6 marks) (2 marks) Act