The company is now considering adding an index tracking fund to their investment offerings and your boss wants you to investigate the different methods of constructing such a tracking portfolio. To do this you should perform the following preliminary analysis:

4. (a) Using the S&P/ASX 200 index as a proxy for the market portfolio (MP), estimate and report the betas of the seven stocks.

(b) Decompose the total risk (variance) of each asset into its systematic and unsystematic components, i.e., report all three values (variance, systematic risk, unsystematic risk) along with the diversification ratio (R2) for each stock and the index.

(c) Assuming risk-free borrowing and lending at rF = 0.75% per annum, plot the capital market line (CML), and indicate the positions of the seven stocks as well as the MP. Again, use the S&P/ASX 200 index as a proxy for the MP.

(d) Plot the security market line (SML), and indicate the positions of the seven stocks as well as that of the MP. Based on this graph, which stocks are overvalued, and which stocks are undervalued?

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