CAPM EXERCISE -- Ta ken from ch

CAPM EXERCISE -- Ta ken from ch. 7 in the text. CAPM

Are the following scenarios valid? Why or why not?

Portfolio A B

Portfolio A B

Expected return .20 .25

Beta

Expected return .30 .40

Standard Deviation .35 .25

1.4 1.2

Portfolio Risk free market A

Portfolio Risk free market A

Expected return .10 .18 .16

Beta

Expected return .10 .18 .16

Beta

0 1 1.5

0 1 .9

Portfolio Risk free market A

Portfolio Risk free market A

Expected return .10 .18 .16

Standard deviation 0 .24 .22

Expected return .10 .18 .26

Standard deviation 0 .24 .12

John West CFA is evaluating the expected performance of two stocks Furman Labs (F) and Gateway testing (G). Risk free = 5% Market expected return = 11.5% Beta for F = 1.5 Beta for G = 8 He forecasts the returns as : 13.25 for F and 11.25 for G. Are the stocks under fairly or overvalued?

MARY Coyle CFA has the following information on two stocks. Foreca Standar beta st d return deviatio n Stock X 14%

36%

0.8

Stock Y 17%

25%

1.5

Market 14%

15%

1.0

Risk free

5%

Calculate the alpha for each stock. Which stock is best for an investor who wants to add it to an already diversified equity portfolio? Why??