Stock Y has a beta of 1.30 and an expected return of 13.5 percent. Stock Z...
Stock Y has a beta of 1.30 and an expected return of 13.5 percent. Stock Z has a beta of .75 and an expected return of 10.6 percent. If the risk-free rate is 4.75 percent and the market risk premium is 7.25 percent, are these stocks overvalued or undervalued?
stock Y = ______
stock Z = ______
Homework Answers
Expected return = Risk-free rate + Beta(Market risk premium)
Stock Y = 0.0475 + 1.30(0.0725) = 0.1418 or 14.18%
Stock Y is overvalued.
Stock Z = 0.0475 + 0.75(0.0725) = 0.1019 or 10.19%
Stock Z is undervalued.
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