Currently, the risk-free rate is 10 percent and the expected return on the market portfolio

Currently, the risk-free rate is 10 percent and the expected return on the market portfolio

Currently, the risk-free rate is 10 percent and the expected return on the market portfolio is 15 percent. Market analysts’ return expectations for four stocks are listed here, together with each stock’s expected beta.

STOCK	EXPECTED RETURN	EXPECTED BETA
1. Stillman Zinc Corporation	17.0%	1.3
2. Union Paint Company	14.5	0.8
3. National Automobile Company	15.5	1.1
4. Parker Electronics, Inc.	18.0	1.7

a. If the analysts’ expectations are correct, which stocks (if any) are overvalued? Which (if any) are undervalued?

b. If the risk-free rate were suddenly to rise to 12 percent and the expected return on the market portfolio to 16 percent, which stocks (if any) would be overvalued? Which (if any) undervalued? (Assume that the market analysts’ return and beta expectations for our four stocks stay the same.)

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