Table below provide data on two stocks, Victoria and Houston. The risk free rate is 4% and the historical market risk premium corresponding to this risk free rate is 6%.
a. Estimate the expected return for each company according to CAPM; use historical market risk premium given below
b. Characterize each stock as undervalued, overvalued, or properly valued according to CAPM and efficient market hypothesis.
Another stock, Sugar Land stock, has a beta of 2.0. Assuming efficient market hypothesis (CAPM holds for each stock), estimate the expected rate of return for a portfolio consisting of 25% Victoria Stock, 50% Houston stock, and 25% Sugar Land Stock,
| Stock |
Victoria |
Houston |
| Forecasted return |
12% |
11% |
| Standard deviation of Returns |
8% |
10% |
| Beta |
1.5 |
1.0 |