On Assignment 6, Im totally confused, do you have any hints?
Youre not the only one here are some hints to help you Question 2: determine what the Beta is for each asset; then determine what the expected return should be using the SML. Then compare the expected return given to the SML expected return to determine if the stock is over or under valued. If it is overvalued, you expect the stock price to drop; if it is undervalued, you expect the stock price to rise. See the text and the graph on p. 294 and the discussion that follows onto pages 295 and 296 to help understand this. Question 3: yes, mathematically, the riskfree rate can end up being negative (although in reality this would not be the case). To check your answers, recalculate the expected returns given your solutions to Rf and Rm. Question 5: Given past data, the sample covariance is calculated as follows (see footnote 2 on page 266): The sample variance and standard deviations are calculated as shown in the lecture notes (lecture 12): Question 6: The analysis here is similar to quest
