You have identified four stocks that may be underpriced. As a result, you collected the following...
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You have identified four stocks that may be underpriced. As a result, you collected the following information. In addition, the expected market risk premium, the market volatility, and the risk-free rate are assumed to be 8%, 20%, and 4%, respectively.. Average Return(%) Fund Stock 1 Stock 2 Stock 3 Stock 4 9 8 15 12 Standard Deviation (%) 15 16 30 20 Beta 0.5 0.4 1.2 0.8 (a) If the CAPM holds, what are the expected returns for each of the four stocks? What are the alphas for each of the four stocks? (b) What are the idiosyncratic volatilities for each of the four stocks? (c) According to Treynor and Black model, how would you construct a portfolio using the four stocks? (d) How would you construct a portfolio using the four stocks and the market portfolio? (e) What is your portfolio beta, expected return, volatility? Do you outperform the market? (hint: compare Sharpe Ratios) You have identified four stocks that may be underpriced. As a result, you collected the following information. In addition, the expected market risk premium, the market volatility, and the risk-free rate are assumed to be 8%, 20%, and 4%, respectively.. Average Return(%) Fund Stock 1 Stock 2 Stock 3 Stock 4 9 8 15 12 Standard Deviation (%) 15 16 30 20 Beta 0.5 0.4 1.2 0.8 (a) If the CAPM holds, what are the expected returns for each of the four stocks? What are the alphas for each of the four stocks? (b) What are the idiosyncratic volatilities for each of the four stocks? (c) According to Treynor and Black model, how would you construct a portfolio using the four stocks? (d) How would you construct a portfolio using the four stocks and the market portfolio? (e) What is your portfolio beta, expected return, volatility? Do you outperform the market? (hint: compare Sharpe Ratios)
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