Stock E(R) Standard Deviation Correlation between the stock and the market portfolio
A 13% 12% 0.9
B 11% 16% 0.5
C 16% 23% 0.3
Standard Deviation for the market portfolio: 8%
Risk free rate of return: 3%
Market rate of return: 11%
a. Calculate the alpha of three stocks above and determine if each stock is underpriced or overpriced. (Hint: You will have to calculate each stock's beta first)
b. If you currently hold a market index portfolio, which stock is the best stock to add to your portfolio? Explain your answer.
c. If you could invest only in T-bills and one of these portfolios, which would you choose? Explain your answer.