Question: Problem 1: Here are data on two companies. The T-Bill rate is 4% and the market risk premium is 6% Company Victoria Store Houston Store

Problem 1: Here are data on two companies. The T-Bill rate is 4% and the market risk premium is 6%

Company Victoria Store Houston Store

Forecasted return 12 % 11 %

Standard Deviation of Returns 8 % 10 %

Beta 1.5 1.0

a. Estimate the expected return for each company according to CAPM

b. Characterize each company as underpriced, overpriced, or properly priced according to CAPM

c. Another company, Sugar Land store, has a beta of 2.0. Assuming efficient market hypothesis (CAPM holds), estimate the expected rate of return for a portfolio consisting of 1/3 Victoria stock, 1/3 Houston stock, and 1/3 Sugar Land store.

*Please show works and state the reason why it is underpriced, overpriced, or properly priced according to CAPM

Thank you!

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