Table below provide data on two stocks

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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

Reference no: EM13895930

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