31. The risk-free rate is 6%, and the expected market return is 15%. A stock with a beta of 1.2 is selling for $25 and will pay a $ 1 dividend at the end of the year. If the stock is priced at $30 at year-end, it is: A. overpriced, so short it. B. underpriced, so buy it. C. underpriced, so short it
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.
31. The risk-free rate is 6%, and the expected market return is 15%. A stock with a beta of 1.2 is selling for $25 and will pay a $ 1 dividend at the end of the year. If the stock is priced at $30 at year-end, it is:
A. overpriced, so short it.
B. underpriced, so buy it.
C. underpriced, so short it
32. A stock with a beta of 0.7 currently priced at $50 is expected to increase in price to $55 by year-end and pay a $1 dividend. The expected market return is 15%, and the risk-free rate is 8%. The stock is:
A. overpriced, so do not buy it.
B. underpriced, so buy it.
C. properly priced, so buy it.
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