# Portfolio Management - Portfolio Management Section 1

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• Option : B
• Explanation : In the capital asset pricing model, the market risk premium is the difference between the return onthe market and the risk free rate, which is equivalent to the return in excess of the market return.

• Option : C
• Explanation : The security market line is a graphical representation of the capital asset pricing model, with beta risk on the x-axis and expected return on the yaxis.

 Stock A B C Investor’s Estimated Return 11.96% 10.88% 16.39% Beta 1.6 1.2 0.96

• Option : C
• Explanation : For a stock to be undervalued, its estimated return should be greater than the required return (from CAPM). This condition is true only for stock C. The required return is calculated using CAPM. Required return for C = 0.022 + 0.96 * (0.0965 - 0.022) = 9.35%. Since the estimated return of 16.39% higher than the required return of 9.35%, the stock is undervalued.

 Expected return of ABC 10% Expected return of the market-index 9% Risk free rate 4% Standard deviation of ABC returns 15% Standard deviation of market-index returns 12% Correlation of ABC and market-index returns 0.5%