Consider the following: Stock X Y Beta Expected return 1.35 13% 0.85 11.5% The risk-free rate...

  

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Consider the following: Stock X Y Beta Expected return 1.35 13% 0.85 11.5% The risk-free rate is 5% and the market risk premium is 6.3%. The expected return above is based on the forecast by five leading investment banks. Because you have learned about the capital asset pricing model (CAPM) in this course, your friend Andy wants to ask you about these two investments and the CAPM. a. Applying the CAPM equation with the above information, determine the expected return of the market, and the required rate of return of Stocks X and Y. (10 marks) b. In the context of the CAPM, do you expect stocks X and Y to be on, above, or below the security market line (SML)? Please explain. (4 marks) c. After doing your calculation, advise Andy on whether he should sell or buy stocks X and Y. (6 marks) d. Explain the concepts of systematic and unsystematic risk, and how these concepts are related to beta. For example, how is a stock with a beta of 1.5 different from one with a beta of 0.5? (10 marks) Consider the following: Stock X Y Beta Expected return 1.35 13% 0.85 11.5% The risk-free rate is 5% and the market risk premium is 6.3%. The expected return above is based on the forecast by five leading investment banks. Because you have learned about the capital asset pricing model (CAPM) in this course, your friend Andy wants to ask you about these two investments and the CAPM. a. Applying the CAPM equation with the above information, determine the expected return of the market, and the required rate of return of Stocks X and Y. (10 marks) b. In the context of the CAPM, do you expect stocks X and Y to be on, above, or below the security market line (SML)? Please explain. (4 marks) c. After doing your calculation, advise Andy on whether he should sell or buy stocks X and Y. (6 marks) d. Explain the concepts of systematic and unsystematic risk, and how these concepts are related to beta. For example, how is a stock with a beta of 1.5 different from one with a beta of 0.5? (10 marks)