You are trying to decide whether to purchase stock or not. The stock is currently sold for $43.54 and is expected to be $46.50 in a year. A dividend of $1.50 per share will be distributed during the year. The stock has a beta of 1.25. The risk-free rate is 3%, and the expected return on the market is 10%. Based on the information, should you buy the stock?
CAPM Return =
= 3% + 1.25 ( 10% - 3%)
= 11.75%
Expected Return =
=
= 10.24%
When CAPM OR required Rate of Return is more than the Expected Return of the stock, the Stock is overvalued.
Overvalued securities are not a buy option. They are sold. No, we should not buy the stock.
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