Is the stock of Firm A correctly priced according to the capital asset pricing model (CAPM)?

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NAME: _____________________________________

You have been provided the following data about the securities of three firms, the market portfolio and the risk-free-asset.

Security Expected Return Standard Deviation Correlation* Beta
Firm A .10 .31 (i) .85
Firm B .14 (ii) .50 1.40
Firm C .16 .65 .35 (iii)
The Market Portfolio .12 .20 (iv) (v)
The Risk-Free Asset .05 (vi) (vii) (viii)

*With the market portfolio

Fill in the missing values in the table.

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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