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,
|Standard deviation of Returns||8%||10%|
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