Question

Where would underpriced and overpriced securities plot on the SML $($security market line$)?$

Explain.

Problem $1$

Here are returns and standard deviations for four investments.

$\backslash$table$[[,$Return $(\%),$St$.$ Deviation $(\%)],[$Treasury Bills,$6,0],[$Stock P$,10,14],[$Stock Q$,14\mathrm{.}5,28],[$Stock R$,21,26]]$

Calculate the standard deviation of the following portfolios.

a$.50\%$ in Treasury bills and $50\%$ in stock $\frac{P}{?}$

b$.50\%$ each in $Q$ and $R,$ assuming the shares have

Perfect positive correlation

Perfect negative correlation

No correlation