Stock Z is currently priced using an expected return of 16.8%. It has a beta of 1.15, and the risk-free rate is 3%. If the market risk premium is 12%, which of the following is CORRECT? You should invest in this stock because, according to CAPM, it is underpriced You should invest in this stock because, according to CAPM, it is overpriced You should short sell this stock because, according to CAPM, it is overpriced You should not invest in this stock because, according to CAPM, it is correctly priced
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.
Stock Z is currently priced using an expected return of 16.8%. It has a beta of 1.15, and the risk-free rate is 3%. If the market risk premium is 12%, which of the following is CORRECT?
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You should invest in this stock because, according to |
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You should invest in this stock because, according to CAPM, it is overpriced |
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You should short sell this stock because, according to CAPM, it is overpriced |
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You should not invest in this stock because, according to CAPM, it is correctly priced |
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