Question: Given the data below, answer the following: a) Calculate the betas of stocks 1 and 2. b) Calculate the beta of the portfolio. c) Calculate

Given the data below, answer the following:

a) Calculate the betas of stocks 1 and 2.

b) Calculate the beta of the portfolio.

c) Calculate the expected return of the portfolio using the CAPM.

d) According to the CAPM, would you classify stocks 1 and 2 as overvalued or undervalued.

e) For the risk-free rate, calculate its correlation with the market and its standard deviation.

f) Briefly discuss the main benefits and drawbacks of the CAPM, compared to other asset-pricing models.

Expected return Correlation with the market portfolio Standard deviation

Stock 1 11.25% 0.90 17%

Stock 2 7% 0.70 12%

Market portfolio 10% 1 13%

Risk free rate 3

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a To calculate the betas of stocks 1 and 2 we use the formula Beta CovarianceStock Market VarianceMarket For Stock 1 Beta1 CovarianceStock 1 Market Va... View full answer

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