As per CAPM, the required return on stock is equal to Risk free Rate + Beta*Market Risk Premium
Hence, stocks with same beta should have same expected return
Hence, If stock A is valued correctly, B in undervalued (since expected return is lower)
Portfolio beta is equal to weighted average beta
= 0.9
Expected return of portfolio will be between 11%*3/4 + 9%*1/4 = 10.5%
Hence, the correct statement is
C.
Stock A has an expected return of 11 percent, a beta of 0.9, and a standard deviation of 15 perce...
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