You are examining three different shares. Share A has expected return 5.20 %, beta 0.47, and volatility 11.00%. Share B has expected return 3.90 %, beta 0.19, and volatility 20.00 %. Finally, share C has expected return 8.60%, beta 0.84, and volatility 29.00%. The risk free rate is 1.90%, while the market price of risk is 8.50%. According to the CAPM, which share is undervalued? OA OB Ос O None of the shares is undervalued
You are examining three different shares. Share A has expected return 5.20 %, beta 0.47, and volatility 11.00%. Share B has expected return 3.90 %, beta 0.19, and volatility 20.00 %. Finally, share C has expected return 8.60%, beta 0.84, and volatility 29.00%. The risk free rate is 1.90%, while the market price of risk is 8.50%. According to the CAPM, which share is undervalued? OA OB Ос 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 5.20%, beta 0.47, and volatility 11.00%. Share B has expected return 3.90%, beta 0.19, and volatility 20.00%. Finally, share C has expected return 8.60%, beta 0.84, and volatility 29.00%. The risk free rate is 1.90%, while the market price of
risk is 8.50%. According to the CAPM, which share is undervalued?
A
OOOO
OB
с
O None of the shares is undervalued
Expert Solution
Step 1
Capital Asset pricing Model helps in determining the fair return of the investment. It determines the required or minimum return on the invetsment. If the required return is less than the expected return stocks are undervalued, meaning the stock can earn return more than the intrinsic return on the stock.
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