Homework Answers
Market Risk Premium = Market Return - Risk free Rate
Market Risk Premium = 7% -3% = 5%
| Expected Return | Beta | Required Return as per CAPM =Risk Free Rate 3% + (Beta x Market Risk Premium 4%) |
Alpha (Expected Return - Requried Return) |
|
| Green Leaf | 10% | 1.26 | 8.04% | 2.0% |
| NatSam | 10% | 2.12 | 11.48% | -1.5% |
| HanBel | 11% | 0.83 | 6.32% | 4.7% |
| Rabecca Automobile | 7% | 1.16 | 7.64% | -0.6% |
If Required Retrun is less than the expected return stock is undervalued, therefore it should be buy.
If Required Return is more than the expected return stock is overvalued, should be sold.
Green Leaf - Undervalued , Buy
HanBel - Undervalued, Buy
NatSam - Overvalued, Sell
Rabecca Automobile - Overvalued, Sell
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