1) Equals
Explanation :- if required return is equal to expected return then the asset is fairly valued and lies on sml. This mean it is in equilibrium.
2) Undervalued
Explanation :- risk free rate = 6%
Market risk premium = 4%
Beta = 1.6
Using CAPM to find required rate of return
Ror = risk free rate + beta × market risk premium
= 6% + 1.6 × 4%
= 6% + 6.4%
= 12.4%
As the expected return 13.5% is more than CAPM return of 12.4% or lies above sml, the stock is undervalued.
3) Overvalued
Explanation:- risk free rate = 6%
Market risk premium = 4%
Beta = 0.7
Using CAPM
Ror= Risk free rate + beta × market risk premium
= 6% + 0.7 × 4%
= 6% + 2.8%
= 8.8%
As the expected return 8% is less than CAPM return of 8.8% or lies below sml , it is considered overvalued.
9. The Capital Asset Pricing Model and the security market line Keith holds a portfolio that...
Keith holds a portfolio that is invested equally in three stocks (wd = wa = W1 = 1/3). Each stock is described in the following table: Stock Beta Expected Return Standard Deviation 25% DET 0.7 8.0% AIL 1.0 38% 10.0% INO 1.6 34% 13.5% An analyst has used market- and firm-specific information to make expected return estimates for each stock. The analyst's expected return estimates may or may not equal the stocks' required returns. The risk-free rate [TRF) is 6%,...
Keith holds a portfolio that is invested equally in three stocks (WD following table: WA w 1/3). Each stock is described in the Stock Beta Standard Deviation Expected Return DET 0.7 AIL 1.0 INO 1.6 25% 38% 34% 8.0% 10.0% 13.5% An analyst has used market- and firm-specific information to make expected return estimates for each stock. The analyst's expected return estimates may or may not equal the stocks' required returns. The risk-free rate [Rr] is 6%, and the market...
Keith holds a portfolio that is invested equally in three stocks (Wp = WA = Wi-1/3). Each stock is described in the following table: Stock Beta Standard Deviation Expected Return DET 0.7 25% 8.0% AIL 1.0 38% 10.0% INO 1.6 13.5% An analyst has used market- and firm-specific information to make expected return estimates for each stock. The analyst's expected return estimates may or may not equal the stocks' required returns. The risk-free rate [TR] is 6%, and the market...
Keith holds a portfolio that is invested equally in three stocks (wp = WA = WI = 1/3). Each stock is described in the following table: Expected Return Standard Deviation 25% 8.0% Stock DET AIL INO Beta 0.7 1.0 1.6 38% 10.0% 34% 13.5% An analyst has used market and firm-specific information to make expected return estimates for each stock. The analyst's expected return estimates may or may not equal the stocks' required returns. The risk-free rate (TRF) is 6%,...
Keith holds a portfolio that is invested equally in three stocks (wp = WA - wy - 1/3). Each stock is described in the following table: Standard Deviation Expected Return Beta 0.7 1.0 25% Stock DET AIL INO 8.09 38% 10.0% 1.6 34% 13.54 An analyst has used market and firm specific information to make expected return estimates for each stock. The analyst's expected return estimates may or may not equal the stocks' required returns. The risk-free rate [ ]...
7. The Capital Asset Pricing Model and the security market line Wilson holds a portfolio that invests equally in three stocks (WA = W3 = Wc = 1/3). Each stock is described in the following table: Stock Beta Standard Deviation Expected Return A 0.5 23% 7.5% B 1.0 38% 12.0% с 2.0 45% 14.0% An analyst has used market- and firm-specific information to generate expected return estimates for each stock. The analyst's expected return estimates may or may not equal...
Please help with the graph. Where do I plot? For the bottom question, the options are as follows. 1. equals, is more than, is less than. 2. in equilibrium, undervalued, overvalued. 3. in equilibrium, undervalued, overvalued. Keith holds a portfolio that is invested equally in three stocks (wD = wA = w-1/3). Each stock is described in the following table Stock Beta Standard Deviation Expected Return DET 0.7 AIL 1.0 INO 1.6 25% 38% 34% 8.0% 10.0% 13.5% An analyst...
1/3). Each stock is described in the Wilson holds a portfolio that invests equally in three stocks (WA = WB Wc following table: Stock Beta Standard Deviation Expected Return A 0.5 23% 7.5% B 1.0 38% 12.0% C 2.0 45% 14.0% An analyst has used market and firm-specific information to generate expected return estimates for each stock. The analyst's expected return estimates may or may not equal the stocks' required returns. You've also determined that the risk-free rate (TRF) is...
Wilson holds a portfolio that invests equally in three stocks (WA = WB = wc = 1/3). Each stock is described in the following table: Stock Beta Expected Return 0.5 Standard Deviation 23% 38% 7.5% 12.0% B C 1.0 2.0 45% 14.0% An analyst has used market and firm-specific information to generate expected return estimates for each stock. The analyst's expected return estimates may or may not equal the stocks' required returns. You've also determined that the risk-free rate (TRF)...
Wilson holds a portfolio that invests equally in three stocks (WAWBWc following table: 1/3). Each stock is described in the Stock Beta Standard Deviation Expected Return A 0.5 23% 38% 45% 7.5% 12.0% 14.0% C 2.0 An analyst has used market- and firm-specific information to generate expected return estimates for each stock. The analyst's expected return estimates may or may not equal the stocks' required returns. You've also determined that the risk-free rate [Rr] is 4%, and the market risk...