Discuss the below:
Capital-asset-pricing model (CAPM)
Q: You have been provided the following data on the securities of three firms, the market portfolio, and the risk-free asset:
| Security |
Expected Return |
Standard Deviation |
Correlation |
Beta |
| Firm A |
0.13 |
0.12 |
? |
0.9 |
| Firm B |
0.16 |
? |
0.4 |
1.1 |
| Firm C |
0.25 |
0.24 |
0.75 |
? |
| The market portfolio (S&P500) |
0.15 |
0.1 |
? |
? |
| The risk-free asset (U.S. T-Bill) |
0.05 |
? |
? |
? |
a. Fill in the missing values in the table.
b. Is the stock of Firm A correctly priced according to the capital-asset-pricing model (CAPM)? What about the stock of Firm B? Firm C? If these securities are not correctly priced, what is your investment recommendation for someone with a well-diversified portfolio?