Problem: A hedge fund manager is seeking a $40 million investment into stocks of three companies (TD, POT and RIM) and in the T-bills. This “average” portfolio should have a beta of 1.3.
(a) If she invests $5 million in TD with a Beta of 0.6 and $8 million in POT with a Beta of 0.9 and if RIM has a Beta of 1.7, how much will you invest in RIM and in the T-Bills?
(b) Assume that the stocks of the three companies are on the Security Market Line. If the prevailing T-bill rate is 3% and the average market risk premium is 4%, what is the rate of return on each stock?
(c) Are the following stocks fairly, under- or over-priced?
|
Stock
|
Price
|
Next Div
|
g
|
Beta
|
|
MFC
|
$21.0
|
$0.6
|
2%
|
1.3
|
|
SLF
|
$29.0
|
$1.0
|
0%
|
0.9
|
|
CSIQ
|
$6.50
|
$0.3
|
8%
|
2.0
|