Assume you own a portfolio consisting of the following stocks:
Stock Percentage of Portfolio Beta (β) Expected Return
1 20% 1.00 16%
2 30% 0.85 14%
3 15% 1.20 20%
4 25% 0.60 12%
5 10% 1.60 24%
a. Determine the expected return on your portfolio.
b. Determine the portfolio beta (βP).
c. Given the portfolio beta and the assumptions that the risk-free rate (rRF) is 7 percent and the expected return on the market portfolio (rMKT) is 15.5 percent, present the equation for the security market line (SML).
d. Based on your equation for the SML and the expected returns from the data in the table, which stocks appear to be winners (i.e., underpriced) and which stocks appear to be losers (i.e., overpriced)?