Problem 1) Stock A has an estimated rate of return of 12% and a beta of 1.2. The market expected rate of return is 12% and the risk-free rate is 2%. The alpha of the stock is:
Problem 2) Stock A has an expected rate of return of 14%. The market expected rate of return is 12% and the risk-free rate is 2%. The beta of the stock is __________.
Problem 3) A portfolio is composed of two stocks, A and B. Stock A has an expected return of 10%, while stock B has an expected return of 18%. What is the proportion of stock A in the portfolio, so that the expected return of the portfolio is 16.4%?
Problem 4) The expected market rate of return is 14%, while the risk-free rate of expected return is 4%. If you expect stock A with a beta of 1.2 to offer a rate of return of 20%, then you should __________.
- buy stock A because it is overpriced
- buy stock A because it is underpriced
- sell short stock A because it is overpriced
- sell short stock A because it is underpriced