. You normally require a return of 14 percent on stocks of similar risk. Is the stock overpriced, underpriced, or correctly priced? - Current Value of Stock? -$ - The stock is (correctly priced/underpriced/overpriced) at $22
Risk and return
Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary.
Capital Asset Pricing Model
Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.
You are currently thinking about investing in a stock valued at $22 per share. The stock recently paid a dividend of $2.60 and its dividend is expected to grow at a rate of 6 percent for the foreseeable future. You normally require a return of 14 percent on stocks of similar risk. Is the stock overpriced, underpriced, or correctly priced?
- Current Value of Stock? -$
- The stock is (correctly priced/underpriced/overpriced) at $22
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