Suppose the risk-free rate is 5% and the expected rate of return on the market portfolio is 10%. given the expected rate of return of a security is 12.2% and this security has a beta of 1.4, is it considered overpriced, under-priced or fairly priced according to the Capital Asset Pricing Model?

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
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a) Suppose the risk-free rate is 5% and the expected rate of return on the market portfolio is 10%. given the expected rate of return of a security is 12.2% and this security has a beta of 1.4, is it considered overpriced, under-priced or fairly priced according to the Capital Asset Pricing Model

b) Stock 1 has a standard deviation of return of 6%. Stock 2 has a standard deviation of return of 4%. The correlation coefficient between the two stocks is 0.5. If you invest 60% of your funds in stock 1 and 40% in stock 2, what is the standard deviation of your portfolio? 

You decide now to combine your portfolio (in b) with another portfolio with the same standard deviation and invest equally in both portfolios. The correlation between the two portfolios is zero.

c) What is the standard deviation of this new portfolio? Did we achieve diversification by combining uncorrelated portfolios with identical levels of risk? 

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