Question #$4$: CAPM $[14$ Points$]$

Use the Figure below to answer Parts $($a$)-($d$)$

$($a$)$ Refer to the above Figure. What is Curve X called? $[2$ Points$]$

$($b$)$ What is the risk$-$free rate $(r_f)?$ No explanation is required. $[1$ Point$]$

$($c$)$ What is the expected return of the market portfolio? No explanation is required. $[1$ Point$]$

$($d$)$ What is the required return of an asset $E(r_i)$ with a beta of $1\mathrm{.}25?[2$ Points$]$

Use the following scenario to answer Parts $($e$)-($g$)$

Suppose that the current price $(P_0)$ for a share of Trane Technologies $($TT$)$ is at $$148\mathrm{.}89.$ The stock is expected to pay $$2\mathrm{.}68$ in dividends next year and you anticipate that you will be able to sell the stock $(P_1)$ for $$161\mathrm{.}41$ next year. Assume that $E(r_M)=0\mathrm{.}115,$ the risk$-$free rate $(r_f)=0\mathrm{.}028$ and TT has a beta $()=1\mathrm{.}3$

$($e$)$ Calculate the $1$ year holding period return $($HPR$)$ for TT stock. Round your answer to four $(4)$ decimal places. $[3$ Points$]$

$($f$)$ What is the required rate of return $E(r_i)$ for TT stock? $[2$ Points$]$

$($g$)$ Is TT stock overpriced or underpriced at its current price. Briefly explain. $[3$ Points$]$