You are examining three different shares. Share A has expected return 8.40%, beta 1.46, and volatility 27.00%. Share B has expected return 1.40%, beta -0.04, and volatility 33.00%. Finally, share C has expected return 5.90%, beta 1.00, and volatility 14.00%. The risk free rate is 1.30%, while the market price of risk is 5.10%. According to the CAPM, which share is undervalued? A B C None of the shares is undervalued
You are examining three different shares. Share A has expected return 8.40%, beta 1.46, and volatility 27.00%. Share B has expected return 1.40%, beta -0.04, and volatility 33.00%. Finally, share C has expected return 5.90%, beta 1.00, and volatility 14.00%. The risk free rate is 1.30%, while the market price of risk is 5.10%. According to the CAPM, which share is undervalued? A B C 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
Related questions
Question
You are examining three different shares. Share A has expected return 8.40%, beta 1.46, and volatility 27.00%. Share B has expected return 1.40%, beta -0.04, and volatility 33.00%. Finally, share C has expected return 5.90%, beta 1.00, and volatility 14.00%. The risk free rate is 1.30%, while the market price of risk is 5.10%. According to the CAPM, which share is undervalued?
|
A
|
||
|
B
|
||
|
C
|
||
|
None of the shares is undervalued
|
Expert Solution
Concept
CAPM (Capital Asset pricing Model) is a model used to calculate the required return from a security from the risk of the security and the risk free return. It help us to calculate whether the security is fairly priced, overpriced or underpriced by comparing the required return with the expected return from the security.
Formula for calculating required rate of return with this model:
Required return= Risk free rate + Market price of risk Beta
Analysis:
If expected return> Required return= Underpriced. We should buy the security.
If expected return< Required return= overpriced. We should sell the security.
If expected return= Required return= fairly priced. We should hold the security.
Step by step
Solved in 2 steps
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Recommended textbooks for you
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education