Calculate the expected return for each stock assuming the Capital Asset Pricing Model (CAPM) is valid, and explain if they are correctly priced. Show your calculations.
Calculate the expected return for each stock assuming the Capital Asset Pricing Model (CAPM) is valid, and explain if they are correctly priced. Show your calculations.
Intermediate Financial Management (MindTap Course List)
13th Edition
ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
Publisher:Eugene F. Brigham, Phillip R. Daves
Chapter3: Risk And Return: Part Ii
Section: Chapter Questions
Problem 1P: The standard deviation of stock returns for Stock A is 40%. The standard deviation of the market...
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Question
-
i) Calculate the expected return for each stock assuming the
Capital Asset Pricing Model (CAPM) is valid, and explain if they are correctly priced. Show your calculations.
![b) Consider the following information in Table 3 for stocks A and B.
Table 3
Stock
Forecasted Return (%)
Standard Deviation (%)
CAPM-beta
А
11%
25%
0.7
В
13%
20%
1.4
The risk-free rate of return is 5%, the expected rate of return on the market index is
11%, and the standard deviation of the market index returns is 15%.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F00af739a-4010-4669-9e5e-5bc99db6959f%2Fe41cd8d0-1115-4478-9574-927198fb91f1%2Fbe2dhj5_processed.png&w=3840&q=75)
Transcribed Image Text:b) Consider the following information in Table 3 for stocks A and B.
Table 3
Stock
Forecasted Return (%)
Standard Deviation (%)
CAPM-beta
А
11%
25%
0.7
В
13%
20%
1.4
The risk-free rate of return is 5%, the expected rate of return on the market index is
11%, and the standard deviation of the market index returns is 15%.
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