You have observed the following returns over time:
|
Year
|
Stock X
|
Stock Y
|
Market
|
|
2006
|
15%
|
11%
|
13%
|
|
2007
|
21
|
7
|
12
|
|
2008
|
-15
|
-6
|
-14
|
|
2009
|
5
|
2
|
3
|
|
2010
|
24
|
8
|
15
|
Assume that the risk-free rate is 3% and the market risk premium is 14%a. What is the beta of Stock X? Round your answer to two decimal places.
a. What is the beta of Stock Y? Round your answer to two decimal places.
b. What is the required rate of return on Stock X? Round your answer to two decimal places.
What is the required rate of return on Stock Y? Round your answer to two decimal places.
c. What is the required rate of return on a portfolio consisting of 80% of Stock X and 20% of Stock Y? Round your answer to two decimal places.
d. If Stock X's expected return is 20%, is Stock X under- or overvalued?
I. Stock X is overvalued, because its expected return exceeds its required rate of return.
II. Stock X is overvalued, because its expected return its is below required rate of return.
III. Stock Y is undervalued, because its expected return exceeds its required rate of return.
IV. Stock X is undervalued, because its expected return is below its required rate of return.
V. Stock Y is undervalued, because its expected return is below its required rate of return.