You have observed the following returns over time:

Assume that the risk-free rate is 6 percent and the market risk premium is 5 percent.

a. What are the betas of Stocks X and Y?

b. What are the required rates of return for Stocks X and Y?

c. What is the required rate of return for a portfolio consisting of 80 percent of Stock X and 20 percent of Stock Y?

d. If Stock X's expected return is 22 percent, is Stock X under- or overvalued?

Year Stock X Stock Y Market 14% 13% 2000 12% 2001 19 10 2002 -5 -12 -16 2003 2004 20 11 15