Based on five years of monthly data, you derive the following information for the companies listed:
a. Compute the beta coefficient for each stock
b. Assuming a risk free rate of 5 percent and an expected return for the market portfolio of 12 percent, compute the expected (required) return for all the stocks.
c. Plot the following estimated returns for the next year on the SML and indicate which stocks are undervalued or overvalued.
• Johnson and Johnson-15%
• Exxon Mobil-10%
• Pfizer-13%
• Microsoft-20%