Question: Currently the risk-free rate equals 5% and the expected return on the market portfolio equals 11%. An investment analyst provides you with the following information:

Currently the risk-free rate equals 5% and the expected return on the market portfolio equals 11%. An investment analyst provides you with the following information:

Stock A Beta 1.33 Expected Return 12%

Stock B Beta 0.7 Expected Return 10%

(a) Calculate the reward-to-risk ratios of stock A, stock B and in market equilibrium. Are stock A and stock B overvalued, undervalued or fairly valued? Briefly explain. [within 150 words]

(b) You want a portfolio with the same risk as the market. Calculate the weights of stock A and B respectively.

(please show me steps and round the final answer to 2 decimal places, thanks)

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