Question

What exactly do we mean when we say that a stock is “fairly priced?” Again, please...

What exactly do we mean when we say that a stock is “fairly priced?” Again, please be specific.

Explain what happens to the “efficient frontier” when we add the possibility of lending and borrowing at the risk-free rate. Please be specific.

0 0
Add a comment Improve this question Transcribed image text
Answer #1

Answer:-

When the stock is trading at a price (market price) is equal to the model price ( the price implied by a dividend discount model or free cash flow valuation model), the stock is considered to be fairly price.

By adding the possibility of lending and borrowing at risk free asset to the efficient frontier, we get one portfolio that belongs to both efficient frontiers ie with risk and without risk.  We get a tangency portfolio which contains only risky assets. The Line I contains only risky assets. In this image we add risk free rate to the port X , Y and Z. The X - axis is standard deviation and Y-axis is mean.

101 0.094 pline I t good 0.07+ ooby Tangeny 005+ ht RF 0.024 00)| 0 0 05 Our Loirs, diz 025 03. Standard deviation

Add a comment
Know the answer?
Add Answer to:
What exactly do we mean when we say that a stock is “fairly priced?” Again, please...
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for? Ask your own homework help question. Our experts will answer your question WITHIN MINUTES for Free.
Similar Homework Help Questions
ADVERTISEMENT
Free Homework Help App
Download From Google Play
Scan Your Homework
to Get Instant Free Answers
Need Online Homework Help?
Ask a Question
Get Answers For Free
Most questions answered within 3 hours.
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT