Question

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). |

Answer #1

Expected rate of return:

Stock Y= Risk free return + beta(market return- risk free return)

= 0.06+1.2(0.07-0.06) = 0.072 or 7.2%

Stock Z = Risk free return + beta(market return- risk free return)

= 0.06 + 0.8(0.07-0.06) = 0.068 or 6.8%

Case 1: we can see that the expected return of stock Y is 15.3% but the CAPM gives a value of 7.2% which means the stock is undervalued in the market.

Case 2: similarly, the expected returns of stock Z in the market is 10.7% but the results shows that it is actually undervalued.

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 A has an expected return of 18.6 percent and a beta of
1.2. Stock B has an expected return of 15 percent and a beta of
0.9. Both stocks are correctly priced and lie on the Security
market Line (SML). What is the reward-to-risk ratio for stock A?
(6marks) (Use the simplest way to calculate)

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.

Stock Y has a beta of 0.7 and an expected return of 9.55
percent. Stock Z has a beta of 1.7 and an expected return of 14.39
percent. What would the risk-free rate (in percent) have to be for
the two stocks to be correctly priced relative to each other?
Answer to two decimals.

Stock Y has a beta of 0.7 and an expected return of 8.1 percent.
Stock Z has a beta of 1.8 and an expected return of 13.37 percent.
What would the risk-free rate (in percent) have to be for the two
stocks to be correctly priced relative to each other?
Answer to two decimals.

Stock Y has a beta of 0.6 and an expected return of 9.7 percent.
Stock Z has a beta of 2.4 and an expected return of 14.97 percent.
What would the risk-free rate (in percent) have to be for the two
stocks to be correctly priced relative to each other?
Answer to two decimals.

1.A stock has a beta of 1.08 and an expected return of 9.32
percent. If the stock's reward-to-risk ratio is 6.35 percent, what
is the risk-free rate?
2. A portfolio consists of $15,600 in Stock M and $24,400
invested in Stock N. The expected return on these stocks is 9.10
percent and 12.70 percent, respectively. What is the expected
return on the portfolio?

#24 Stock A has a beta of 1.2 and an expected return of 12%.
Stock B has a beta of 0.7 and an expected return of 8%. If the
risk-free rate is 2% and the market risk premium is 8%, what is
true about the two stocks? A. Stock A is underpriced and stock
B is overpriced B. Both stocks are underpriced
C. Stock A is overpriced and stock
B is underpriced
D. Both stocks are correctly priced
E. Both...

Stock L has an expected return of 13.0% with a beta of 1.25, while
Stock M has an expected return of 11.5% with a beta of .90. If the
risk-free rate is 3.25% and the market risk premium is 8.5%, then
are either of these stocks overvalued?
Neither are overvalued
Stock M only
Both
are overvalued
Stock L only

Floyd Industries stock has a beta of 1.2. The company just paid
a dividend of $.50, and the dividends are expected to grow at 6
percent per year. The expected return on the market is 11 percent,
and Treasury bills are yielding 4.6 percent. The most recent stock
price for Floyd is $63.
a.
Calculate the cost of equity using the DDM method. (Do
not round intermediate calculations. Enter your answer as a percent
rounded to 2 decimal places (e.g.,...

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