You are examining three different shares. Share A has expected return 3.20 %, beta 0.81, and volatility 11.00%. Share B has expected return -0.30 %, beta -0.25, and volatility 28.00%. Finally, share C has expected return 6.00 %, beta 1.56, and volatility 34.00%. The risk free rate is 1.00%, while the market price of risk is 3.40%. According to the CAPM, which share is undervalued? OA OC O None of the shares is undervalued
You are examining three different shares. Share A has expected return 3.20 %, beta 0.81, and volatility 11.00%. Share B has expected return -0.30 %, beta -0.25, and volatility 28.00%. Finally, share C has expected return 6.00 %, beta 1.56, and volatility 34.00%. The risk free rate is 1.00%, while the market price of risk is 3.40%. According to the CAPM, which share is undervalued? OA OC O None of the shares is undervalued
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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Transcribed Image Text:You are examining three different shares. Share A has expected return 3.20%, beta 0.81, and volatility 11.00%. Share B has expected return -0.30%, beta -0.25, and volatility 28.00%. Finally, share C has expected return 6.00%, beta 1.56, and volatility 34.00%. The risk free rate is 1.00%, while the market
price of risk is 3.40%. According to the CAPM, which share is undervalued?
A
B
ООС
с
None of the shares is undervalued
Expert Solution
Concept
Formula for calculating required rate of return as per CAPM model:
Required return= Risk free rate + Market price of risk× Beta
In the given question,
Risk free rate= 1%
Market price of risk= 3.40%
If expected return> Required return= Undervalued.
If expected return< Required return= overvalued.
If expected return= Required return= fairly valued.
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