Overview
I don’t know how to handle this Mathematics question and need guidance.
1) a) Fill in the 8 missing values in the table.
Security
Expected Return
Standard Deviation
Correlation*
Beta
Firm A
.105
.31
=_______
.85
Firm B
.148
=_______
.50
1.40
Firm C
.160
.65
.35
=_______
Market Portfolio
.120
.20
=_______
=_______
Risk–free asset
.050
=_______
=_______
=_______
* with the market portfolio
b) According to the CAPM, Is the stock of Firm A correctly priced (check the correct box)?
Yes ? No (the stock is overpriced) ? No (the stock is underpriced) ?
c) According to the CAPM, Is the stock of Firm B correctly priced (check the correct box)?
Yes ? No (the stock is overpriced) ? No (the stock is underpriced) ?
d) According to the CAPM, Is the stock of Firm C correctly priced (check the correct box)?
Yes ? No (the stock is overpriced) ? No (the stock is underpriced) ?