Stock analyst, Mr. Abhay, is analysing 3 stocks A, B and C having 3 common risk factors. Following data is observed. Assume λ0 as 5%. Calculate return as per APT model. If the expected returns of A, B and C are 13%, 18% and 11% respectively, indicate which stocks are undervalued or overvalued. What will be the implication in terms of arbitrage? Mr. Abhay is also interested in analysing the expected returns as per CAPM model. Risk free rate is 6%. Average Market Return is 19%. The equity beta of A, B and C are 1.1, 0.85 and 0.55 respectively. Calculate the required return as per CAPM and plot the stocks on SML. Indicate if the stocks are undervalued or overvalued if the expected returns are 13%, 18% and 11% respectively for A, B and C. Beta / Sensitivity Factor Risk Premium Stock A Stock B Stock C Management Risk 5.5% 1.5 1.1 0.8 Interest Rate Risk 2.0% 0.8 0.5 0.4 Inflation Risk 3.5% 0.5 0.9 0.7
Stock analyst, Mr. Abhay, is analysing 3 stocks A, B and C having 3 common risk factors. Following data is observed. Assume λ0 as 5%. Calculate return as per APT model. If the expected returns of A, B and C are 13%, 18% and 11% respectively, indicate which stocks are undervalued or overvalued. What will be the implication in terms of arbitrage? Mr. Abhay is also interested in analysing the expected returns as per CAPM model. Risk free rate is 6%. Average Market Return is 19%. The equity beta of A, B and C are 1.1, 0.85 and 0.55 respectively. Calculate the required return as per CAPM and plot the stocks on SML. Indicate if the stocks are undervalued or overvalued if the expected returns are 13%, 18% and 11% respectively for A, B and C. Beta / Sensitivity Factor Risk Premium Stock A Stock B Stock C Management Risk 5.5% 1.5 1.1 0.8 Interest Rate Risk 2.0% 0.8 0.5 0.4 Inflation Risk 3.5% 0.5 0.9 0.7
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Question
- Stock analyst, Mr. Abhay, is analysing 3 stocks A, B and C having 3 common risk factors. Following data is observed. Assume λ0 as 5%.
- Calculate return as per APT model. If the expected returns of A, B and C are 13%, 18% and 11% respectively, indicate which stocks are undervalued or overvalued. What will be the implication in terms of arbitrage?
- Mr. Abhay is also interested in analysing the expected returns as per CAPM model. Risk free rate is 6%. Average Market Return is 19%. The equity beta of A, B and C are 1.1, 0.85 and 0.55 respectively. Calculate the required return as per CAPM and plot the stocks on SML. Indicate if the stocks are undervalued or overvalued if the expected returns are 13%, 18% and 11% respectively for A, B and C.
|
|
|
Beta / Sensitivity |
||
|
Factor |
Risk Premium |
Stock A |
Stock B |
Stock C |
|
Management Risk |
5.5% |
1.5 |
1.1 |
0.8 |
|
Interest Rate Risk |
2.0% |
0.8 |
0.5 |
0.4 |
|
Inflation Risk |
3.5% |
0.5 |
0.9 |
0.7 |
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