Question

Please read! The CLICK TO SELECT dropdowns have two options: undervalued and overvalued. Select either one for each. Thanks!

Stock Y has a beta of 1.2 and an expected return of 14.5 percent. Stock Z has a beta of 7 and an expected return of 9.3 percent. If the risk-free rate is 5.6 percent and the market risk premium is 6.6 percent, the reward-to-risk ratios for stocks Y and Z are and percent, respectively. Since the SML reward-to-risk is percent, Stock Yis (Click to select) and Stock Z is (Click to select) (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)

Answer 1

Calculate the reward to risk ratio as follows:

B B Stock Y 1.2 14.50% 5.60% 6.60% 11 Particulars 12 Beta 13 Expected return 14 Risk free rate 15 Market risk premium 16 17 Reward risk ratio 18 Reward risk ratio 19 Stock Stock Z Market 0.7 9.30% 7.42% 5.29% 6.60% Under valued Overvalued

Formulas:

В C D Market Stock Z 0.7 11 Particulars 12 Beta 13 Expected return 14 Risk free rate 15 Market risk premium 16 17 Reward risk ratio 18 Reward risk ratio 19 Stock Stock Y 1.2 0.145 0.056 0.066 0.093 =(B13-B14)/B12 =(C13-B14)/C12 =B15/D12 Under valued Overvalued