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Q4) a. Given the risk-free rate is 4%. The expected market rate of return...

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Finance

Q4)

a. Given the risk-free rate is 4%. The expected market rate of return is 12%. If you expect stock X with a beta of 1.0 to offer a rate of return of 10%

  1. Determine the stock is overpriced or underpriced (5 marks)
  2. What is your strategy (long or short?) (5 marks)

b. You invest 50% of your money in security A with a beta of 1.6 and the rest of your money in security B with a beta of 0.7.

  1. What is the beta of the resulting portfolio? (5 marks)
  2. Discuss the importance of portfolio beta in asset allocation (5 marks)

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