Part A:
CAPM Ret = Rf + Beta ( Rm - Rf)
Rf = Risk free rate
Beta = Systematic Risk
Rm = Market ret
Stock A:
CAPM Ret = Rf + Beta ( Rm - Rf)
= 4% + 0.7 (24% - 4%)
= 4% + 0.7( 20%)
= 4% +14%
= 18%
Actual Ret = 16%
as Actual ret < CAPM ret, Stock is under performed.
STock B:
CAPM Ret = Rf + Beta ( Rm - Rf)
= 4% + 0.8 (24% - 4%)
= 4% + 0.8( 20%)
= 4% +16%
= 20%
Actual Ret = 20%
as Actual ret = CAPM ret, Stock is perfectly priced.
Hence STock B is selected over STock A.
Part B:
CAPM ret of Stock A:
CAPM Ret = Rf + Beta ( Rm - Rf)
= 5% +1.2 (15% - 5%)
= 5% + 1.2( 10%)
= 5% +12%
= 17%
Actual Ret = 14%
as Actual ret < CAPM ret, Stock is under performed.
IF CAPM is Valid, the situation is not possible.
Pls comment,if any further assistance is required.
Question 5 (8 points) a. The expected rates of return for stocks A and B are...
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