Jenny has $200,000 to invest and is considering the merits of two securities. He is interested in the common shares of X Co. and Y Inc. The possible monthly rate of return of the securities is shown below: Possible Monthly Rate of Return of Security in January 2019 Probability State of Affair Stock X Stock Y Boom 0.2 50% -5% Normal 0.5 15% 8% Recession 0.3 -5% 10%

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
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(d) Suppose the risk-free rate is 4%, the market risk premium is 15% and the betas for stocks X and Y are 1.2 and 0.2 respectively. Using the CAPM model, estimate the required rates of return of Stock X and Stock Y. 

(e) Given the results above, are Stocks X and Y overpriced or underpriced? Explain. 

Jenny has $200,000 to invest and is considering the merits of two securities. He is interested in the
common shares of X Co. and Y Inc. The possible monthly rate of return of the securities is shown
below:
Possible Monthly Rate of Return of Security in January 2019
Probability
State of Affair
Stock X
Stock Y
Boom
0.2
50%
-5%
Normal
0.5
15%
8%
Recession
0.3
-5%
10%
Transcribed Image Text:Jenny has $200,000 to invest and is considering the merits of two securities. He is interested in the common shares of X Co. and Y Inc. The possible monthly rate of return of the securities is shown below: Possible Monthly Rate of Return of Security in January 2019 Probability State of Affair Stock X Stock Y Boom 0.2 50% -5% Normal 0.5 15% 8% Recession 0.3 -5% 10%
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