Question: Risk Free Rate = 3% Borrowing Rate = 4% Return on the Market index = 10% Market index standard deviation = 18% a. Kevin is

Risk Free Rate = 3%

Borrowing Rate = 4%

Return on the Market index = 10%

Market index standard deviation = 18%

a. Kevin is a passive investor who has $100,000 to invest. His target rate of return is 12.4%. Based on the data above, how much portfolio risk (std dev) will Kevin need to take to achieve his target?

b. Wales Inc. has a beta of .4 and it is believed to have a 5.8% rate of return. You calculate the stock price of Wales using the CAPM with the data above, but you also consider the bias in the CAPM. After adjusting for the bias, the price of Wales is most likely to be: overvalued, undervalued, fairly valued or impossible to tell?

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