Problem
You have identified four stocks that may be underpriced. As a result, you collected the following information. In addition, the expected market return, the market volatility, and the risk-free rate are assumed to be 11%, 20%, and 3%, respectively. .
|
Fund
|
Averagereturn(%)
|
StandardDeviation(%)
|
Beta
|
|
Stock 1
|
9
|
18
|
0.6
|
|
Stock 2
|
11
|
26
|
0.8
|
|
Stock 3
|
14
|
30
|
1.2
|
|
Stock 4
|
8
|
15
|
0.4
|
A. If the CAPM holds, what are the expectedreturns for each of the four stocks? What are the alphas for each of the four stocks?
B. What are the idiosyncratic volatilities for each of the four stocks?
C. According to Treynor and Black model, how would you construct a portfolio using the four stocks?
D. How would you constructa portfolio using the four stocks and the market portfolio?
E. What is your portfoliobeta, expected return, volatility? Do you outperform the market?