c) Assume that using the Security Market Line (SML) the required rate of return (RA) on stock A is found to be half of the required return (RB) on stock B. The risk-free rate (Rf) is one-fourth of the...

c) Assume that using the Security Market Line (SML) the required rate of return (RA) on stock A is found
to be half of the required return (RB) on stock B. The risk-free rate (Rf) is one-fourth of the required
return on A. Return on market portfolio is denoted by RM. Find the ratio of beta of A (A) to beta of B
(B). (10 marks)
d) Assume that the short-term risk-free rate is 3%, the market index S&P500 is expected to pay
returns of 15% with the standard deviation equal to 20%. Asset A pays on average 5%, has standard
deviation equal to 20% and is NOT correlated with the S&P500. Asset B pays on average 8%, also has
standard deviation equal to 20% and has correlation of 0.5 with the S&P500. Determine whether
asset A and B are overvalued or undervalued, and explain why. (10 marks)
(Hint: Beta of asset i (??) =
?????
??
, where ??
,?? are standard deviations of asset i and market
portfolio, ??? is the correlation between asset i and the market portfolio)

Extracted text: c) Assume that using the Security Market Line (SML) the required rate of return (Ra) on stock A is found to be half of the required return (Rs) on stock B. The risk-free rate (R) is one-fourth of the required return on A. Return on market portfolio is denoted by Rm- Find the ratio of beta of A (ßa) to beta of B (BB). (10 marks)