beta of 1.40 and an expected return of 19%. Stock Z has a beta of 0.65 and an expected return of 10.5%. The market risk premium is 8.8%. The risk-free rate is 6%, are these stocks correctly priced? Show your argument for each stoc
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 Y has a beta of 1.40 and an expected return of 19%. Stock Z has a beta of 0.65 and an expected return of 10.5%. The market risk premium is 8.8%. The risk-free rate is 6%, are these stocks correctly priced? Show your argument for each stock.
Hint: first find the expected return using CAPM for each stock.
Trending now
This is a popular solution!
Step by step
Solved in 3 steps
