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 -

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 Victoriastock, 1/3 Houston stock, and 1/3 Sugar Land store

.

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