II. Problems 1. (20 points) We have the following probability distributions of returns for Gould and Sarathy stocks: State of Economy Poor Average Good Stock Gould Sarathy The risk-free rate, Irf, is 3% and the required return on the market, Tm, is 10%. Following are the betas of each of the stocks: Gould Sarathy Portfolio Gould Probability .25 .40 .35 a. What are the expected returns of each of these stocks and a portfolio consisting of 30% in Gould and 70% in Sarathy? Sarathy Gould -0.18 0.16 0.40 Beta 1.45 1.22 Portfolio Sarathy 0.06 0.10 0.14 b. What are the required returns on each of the stocks and the portfolio in part a? c. Graph the Security Market Line. On your graph plot the expected returns of Gould, Sarathy and the portfolio and indicate whether each is over- or under-valued. Be sure to label your graph completely.

1. (20 points) We have the following probability distributions of retums for Gould and Sitrathy stocks: The risk-free rate, rngr is 3% and the required returm on the market, Tmm is 10%. Following are the betas of each of the stocks: a. What are the expected returns of each of these stocks and a portfolio consisting of 30% in Gould and 70% in Sarathy? Gould Sarathy Portfolio b. What are the required returns on each of the stocks and the portfolio in part a? Gould Sarathy Portfolio c. Graph the Security Market Line. On your graph plot the expected returns of Gould, Sarathy and the portfolio and indicate whether each is over-or under-valued. Be sure to label your graph completely