Q3) Consider the following table, which gives a security analysts expected return on two stocks in two particular scenarios for the rate of return on the market. Assume that both scenarios are equally likely to happen (i.e., probability of scenario 1 = probability of scenario 2=0.5).

Q4) You are considering investing in stock S and you want to know how stock S is related to the market portfolio M. Given your research, you discovered the following information:

	Expected Return	Standard Deviation
Stock (S)	15%	25%
Market (M)	12%	20%
Risk-free	2%
Correlation of S and M	40%

1. What is the exposure of stock S to market risk? (3 points)
2. Discuss whether according to the CAPM, stock S is overvalued, undervalued or fairly valued. (2 points)
3. What is the level of systematic and idiosyncratic risk for stock S? (5 points)

1. What are the betas of the two stocks? (5 points)
2. Plot the two securities on the SML graph. Assume that T-bill rate is 6%. (5 points)
3. What are the alphas of each? (5 points)