An analyst collected the following data for three possible investments. The expected return on the market is 12% and the risk-free rate is 4%. According to the security market line (SML), which of the three securities is correctly priced? 1)Alpha Stock : Price Today : 25 Forecast price : 31 Dividend : 2 Beta : 1.6 2)Omega Stock : Price Today : 105 Forecast price : 110 Dividend : 1 Beta : 1.2 3)Lambda Stock : Price Today : 10 Forecast price : 10.8 Dividend : 0 Beta : 0.5

An analyst collected the following data for three possible investments. The expected return on the market is 12% and the risk-free rate is 4%. According to the security market line (SML), which of the three securities is correctly priced? 1)Alpha Stock : Price Today : 25 Forecast price : 31 Dividend : 2 Beta : 1.6 2)Omega Stock : Price Today : 105 Forecast price : 110 Dividend : 1 Beta : 1.2 3)Lambda Stock : Price Today : 10 Forecast price : 10.8 Dividend : 0 Beta : 0.5

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter8: Analysis Of Risk And Return

Section: Chapter Questions

Problem 7P

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An analyst collected the following data for three possible investments. The expected return on the market is 12% and the risk-free rate is 4%. According to the security market line (SML),

which of the three securities is correctly priced?

1)Alpha Stock : Price Today : 25 Forecast price : 31 Dividend : 2 Beta : 1.6

2)Omega Stock : Price Today : 105 Forecast price : 110 Dividend : 1 Beta : 1.2

3)Lambda Stock : Price Today : 10 Forecast price : 10.8 Dividend : 0 Beta : 0.5

Leveraging special tenchniques in analyzing historical data to predict future trends. Forecasting covers the methods and types of forecasting and their application to case studies.

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Step 2: Calculation for expected rate of return for alpha Stock, omega Stock, and Lambda Stock

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Step 3: Calculation for actual rate of return for alpha Stock, omega Stock, and Lambda Stock

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Step 4: Selection for the correctly priced stock

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