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Capital-asset-pricing model (CAPM)

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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?

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Solution Summary

Fills up missing values (standard deviation, correlation, beta) in a table. Uses capital-asset-pricing model (CAPM) to determine whether securities are correctly priced.

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