Alpha Of Three Stocks 538329

Stock E(R) Standard Deviation Correlation between the stock and the market portfolio

A 13% 12% 0.9

B 11% 16% 0.5

C 16% 23% 0.3

Standard Deviation for the market portfolio: 8%

Risk free rate of return: 3%

Market rate of return: 11%

a. Calculate the alpha of three stocks above and determine if each stock is underpriced or overpriced. (Hint: You will have to calculate each stock’s beta first)

b. If you currently hold a market index portfolio, which stock is the best stock to add to your portfolio? Explain your answer.

c. If you could invest only in T-bills and one of these portfolios, which would you choose? Explain your answer.