Question

- If security X’s beta is 1.30, the expected return on the market is 6%, and the risk-free rate is 1%.

- What must the expected return on this stock be? (10 points)

b.If the current expected return of security X is 8%, is the stock price fair, undervalued or overvalued? (10 points)

Answer #1

The market price of a security is $60. Its expected rate of
return is 10%. The risk-free rate is 6%, and the market risk
premium is 8%. What will the market price of the security be if its
beta doubles (and all other variables remain unchanged)? Assume the
stock is expected to pay a constant dividend in perpetuity. (Round
your answer to 2 decimal places.) Market price $

Stock Y has a beta of 1.5 and an expected return of 14.2
percent. Stock Z has a beta of 0.85 and an expected return of 10.7
percent.
Required:
If the risk-free rate is 4.6 percent and the market risk premium
is 7.1 percent, are these stocks correctly priced?
Stock Y
undervalued or overvalued?
Stock Z
undervalued or overvalued?

Stock Y has a beta of 1.2 and an expected return of 15.3 percent.
Stock Z has a beta of .8 and an expected return of 10.7 percent. If
the risk-free rate is 6 percent and the market risk premium is 7
percent, the reward-to-risk ratios for stocks Y and Z
are and percent, respectively. Since the SML
reward-to-risk is percent, Stock Y is Undervalued of
Overvalued (pick one) and Stock Z is Undervalued of
Overvalued (pick one). (Do not round intermediate
calculations. Enter...

Suppose the required rate of return on a stock with Beta 1.2 is
18 per cent and risk free rate is 6 per cent. According to the
CAPM
a) What is the expected rate of return on the market
portfolio?
b) What is the expected rate of return of a zero-beta
security?
c) Suppose you select Stock ABC for Rs. 50 and the stock is
expected to pay a dividend of rs. 2 next year and is expected to
fetch...

A stock with a beta of 0.77 currently priced at $45 is expected
to increase in price to $65 by year-end and pay a $1 dividend. The
expected market return is 17%, and the risk-free rate is 8%.
Determine by calculations if the stock is overvalued or
undervalued.

Stock X’s beta is 1.8, the nominal
risk-free rate is 2.4 percent, and the expected rate of return on
an average stock is 12 percent. The current price for Stock X is
$8. The dividend that was just paid was $0.80, and the stock’s
expected constant growth rate is 8 percent. Should Larson buy this
stock? (Calculate the equilibrium value of the stock and decide
if it’s worth $8.)

Security A has a beta of 0.99. The market expected rate of
return is 8%, and the risk-free rate is 3%. If the Security A is
observed with an expected return of
8.02%, the alpha of the stock is _________. Present your answer in
% and two decimal places. For example, if the answer is
5.53%, input 5.53.

Home Interior's stock has an expected return of 13.2 percent and
a beta of 1.28. The market return is 10.7 percent and the risk-free
rate is 2.8 percent. This stock is overvalued or undervalued?
____________ because the CAPM return for the stock is ________
percent. If Home Interior's expected return rose to 14.12%, the
stock would be overvalued or undervalued? ____________ because the
CAPM return for the stock is ________ percent. Please show your
work.

1.) According to the CAPM, what is the expected return on a
security given a market risk premium of 9%, a stock beta of 0.57,
and a risk free interest rate of 1%? Put the answers in decimal
place.
2.) Consider the CAPM. The risk-free rate is 2% and
the expected return on the market is 14%. What is the expected
return on a portfolio with a beta of 0.5? (Put answers
in decimal points instead of percentage)
3.) A...

A stock has a beta of 1.65, the expected return on the market is
10 percent, and the risk-free rate is 6 percent. What must the
expected return on this stock be?

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