A stock has a CAPM return of 4.4% and an HPR return of 5.5%. Which of the following is true? You should buy the stock because it is undervalued. You should short the stock because it is undervalued. You should buy the stock because it is overvalued. You should short the stock because it is overvalued.
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.
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A stock has a
CAPM return of 4.4% and an HPR return of 5.5%. Which of the following is true?You should buy the stock because it is undervalued.
You should short the stock because it is undervalued.
You should buy the stock because it is overvalued.
You should short the stock because it is overvalued.
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