Youhaveidentifiedfourstocksthatmaybeunderpriced.Asaresult,youcollectedthefollowinginformation. Inaddition,theexpectedmarketreturn,themarketvolatility,andtherisk-freerateareassumedtobe11%,20%,and 3%, respectively.. Fund Averagereturn(%) StandardDeviation(%) Beta Stock1 9 18 0.6 Stock2 11 26 0.8 Stock3
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Question:
- You have identified four stocks that may be underpriced. As a result,you collected the following information. In addition,the expected market return, the market volatility, and the risk-free rate are assumed to be 11%, 20%, and 3%, respectively. .
Fund
Averagereturn(%)
StandardDeviation(%)
Beta Stock 1
9
18
0.6 Stock 2
11
26
0.8 Stock 3
14
30
1.2 Stock 4
8
15
0.4 - If the CAPM holds, what are the expectedreturns for each of the four stocks? What are the alphas for each of the four stocks?
- What are the idiosyncratic volatilities for each of the four stocks?
- According to Treyn or and Black model, how would you construct a portfolio using the four stocks?
- How would you construct a portfolio using the four stocks and the market portfolio?
- What is your portfolio beta, expected return, volatility? Do you outperform the market? (hint: compare Sharpe Ratios)
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