Answered: which of the following stocks are…

Business

Finance

which of the following stocks are undervalued, overvalued and fairly valued.

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter8: Analysis Of Risk And Return

Section: Chapter Questions

Problem 1P

See similar textbooks

Related questions

Q: Consider the single-index model. The alpha of a stock is 0%. The return on the market index is 16%.…

A: Stock Return = 11% + 5% Stock Return = 16%

Q: 3. Consider three stocks A, B and C and a market index M with the following prices: Year то T1 T2…

A: Note: This question has several sub-parts. The first three have been answered below

Q: A stock has a required return of 9%, the risk-freerate is 4.5%, and the market risk premium is 3%.a.…

A: Capital Asset Pricing Model (CAPM): CAPM is the method of calculating the expected return on…

Q: If a stock has a beta of 0.8, what doesthat imply about its risk relative to the market?

A: Beta: Beta can be defined as the measure of instability of a separate stock relative to the…

Q: A stock with a beta of zero would be expected to a. have a rate of return equal to one b. have a…

A: In the Given question we are given four options related to beta and rate of return of the stock and…

Q: A stock's returns have the following distribution: Demand for the Probability of This Rate of Return…

A: Stock’s expected return is the return which is expected to be generated from the project. This…

Q: Assume a stock has a required return on equity, ?? = 12%. The risk-free rate is ?? = 5% and the…

A: The mathematical equation for the concept is:

Q: Let r be the expected return of stock i, rRE represent the risk-free rate, b represent the Beta of a…

A: Capital Asset Pricing Model: The CAPM explains the relationship between expected return and…

Q: 1. The market and Stock A have the following probability distributions: Return on Return on…

A: Coefficient of Variation = Standard Deviation / Average Return

Q: Consider the following information about Stocks X and Y: State of Economy Probability of State Stock…

A: Given: Economy Probability (P) Stock X Stock Y Recession 0.15 0.11 -0.25 Steady 0.55 0.18…

Q: Suppose that the index model for stocks A and B is estimated from excess returns with the following…

A: Calculation of standard deviation for each stock: Answer: Standard deviation of A is 31.30% Standard…

Q: What is the standard deviation of the returns on a stock given the following information? Could you…

A: For calculating the standard deviation using the following formula. SD = ∈[ P(GR-ER)2] Where P =…

Q: Suppose that the index model for stocks A and B is estimated from excess returns with the following…

A: The question is based on the concept of co-variance calculation between stock and market index , in…

Q: If the standard deviation of a stock’s return is 5% and its expected return is 8%, what it the C.V.?

A: According to the, because you have posted multiple questions, we will answer the first question…

Q: If Stock A has a lower expected return than Stock B, which of the following statements is least…

A: Beta is a measure of systematic risk for the company or security. It is the risk measure to show to…

Q: Suppose that the index model for stocks A and B is estimated from excess returns with the following…

A: Covariance is a statistical measure used to analyze the relationship between two variables.…

Q: Which of the following is true for testing stock price predictability? Select one: O a. All of the…

A: Answer- Option (A) = All the above options. The forecast of the stock market is the act of trying…

Q: Assume that Home Afrika stock has an expected return of 15%, a required rate of return (RRR) of 12%,…

A: To analyze, the stock is a risk for an investor then standard deviation of both the stock.…

Q: Consider the two (excess return) index model regression results for A and B: RA = 0.8% + 1RM…

A: Residual standard deviation is measured by using the firm specific risk.

Q: You are comparing Stock A to Stock B. Given the following information, what is the difference in the…

A: The expected return of stock refers to the return that is anticipated on a stock. Investors…

Q: b) The covariance between stocks A and B is 0.0014, standard deviation of stock A is 0.032, and…

A: Correlation determines how assets move in relation to each other. A coefficient of 1 means a perfect…

Q: USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM Stock Rit Rmt ai Beta C 12 10 0 0.8…

A: Abnormal return = Return in excess of market return in the given period = Rit - RmtFor stock C, the…

Q: Abnormal returns, if a stock has a(Alpha)=.004, b(Beta)=1.2, A. Using the market model (eq. 7.4),…

A: Beta tells us how many times the stock shall move upward or downward with the increase/decrease in…

Q: E(R) E(R) E(R) A A B.

A: The most appropriate image that represents the risk and returns characteristics of a portfolio is…

Q: Interpret your results in (c) above, assuming that the historical average return of 8.5% from the…

A: d) In part c, at a rate of 8.59% the stock is considered to be fairly priced. However, since the…

Q: Michael, an analyst at Kitsch Partners (KP), models the stock of the company. Suppose that the…

A: Correct answer is option (d) 13.98%.

Q: The following three stocks are available in the market: E(R) β Stock A 10.9 % 1.18…

A: Given the following information Expected return of Stock A: 10.9%Beta of Stock A: 1.18 Expected…

Q: Assume the risk-free rate is 2%. Calculate the stock's expected return, standard deviation,…

A: Expected return refers to the loss or profit that an investor anticipates for investing in a…

Q: Is the following statement correct, wrong or partially correc? Why? "If the volatility of Stock A is…

A: This statement is CORRECT.

Q: A stock's contribution to the market risk of a well-diversified portfolio is called risk. It can be…

A: Total risk can be measured as systematic risk and unsystematic risk.

Q: In which of the cases is the volatility lower than that of the original stocks? (Select the best…

A: Stock Volatility is the fluctuation in the prices of the stock on either upside or downside.

Q: Consider the following information about Stocks I and II: Probability of State of Economy State of…

A: An expected return is the return of the specific stock that is the chances of received at the end of…

Q: 7. In a small stock market, there are three assets. The corresponding covariance matrix and the…

A: Expected return on portfolio With three assets, the expected return on portfolio is calculated as…

Q: The information regarding the risk level of three different stocks is presented below. 1. Which…

A: Higher beta is not desirable.

Q: Suppose you have predicted the following returns for stock C in three possible states of nature.…

A: The expected rate of return is the weighted return that an investor receives based on the various…

Q: Consider the two (excess return) index model regression results for A and B: RA = 0.8% + 1RM…

A: a)Firm Specific risk is measured by Residual Standard Deviation

Q: What is the coefficient of variation for stock A?

A: Information Provided: Stock A expected return = 8% Stock A risk = 6%

Q: A stock has a required return of 11%, the risk- free is 7%, and the market risk premium is 4%. a.…

A: In this problem we require to calculate the beta of the stock and the revised required rate of…

Q: We have the following information on Stocks A and B. The risk-free rate is S the market risk premium…

A: Stock is overpriced when the expected return is less than required rate and when stock is…

Q: Which of the following statements is CORRECT? 1. a. Tests have shown that the betas of…

A: Portfolio Beta vs Individual Beta: When it comes to financial instruments, beta is described as "a…

Q: Assume that the risk-free rate is 3.5% andthe market risk premium is 4%. What is the required return…

A: Given: Risk-free rate (rRF) = 3.5% Market risk premium (rM – rRF) = 4% Stock beta (bS) = 0.8

Q: Assume that you have a portfolio of two stocks, X and Y. If the risk of stock X is 1.2 and the risk…

A: 4) For a rational investor, if risk is higher investor demands greater return.

Q: Assume the risk-free rate is r = 3%. Consider the data in the table below: Stock Expected Return…

A: The capital market line (CML) represents portfolios that optimally combine risk and return. capital…

Q: 1.Which of the following is assumed by the Black-Scholes-Merton model? A.The return from the stock…

A: Black-Scholes-Merton model is used for the pricing of financial instruments and for the valuation of…

Question

Assume you know the expected and required rate of returns of the following stocks. Explainwhich of the following stocks are undervalued, overvalued and fairly valued.

Stock	Expected rate of return	Required rate of return	Evaluation
X	10	12	?
Y	6	5	?
Z	4	4	?

Definition Definition Percentage gain or loss from a specific investment over time. The rate of return is the difference between the closing and initial values of an investment divided by the initial value of the investment. The closing value includes any intermediate cash flows such as dividends or interest amounts.

Expert Solution

This question has been solved!

Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.

SEE SOLUTION Check out a sample Q&A here

Step 1

VIEW

Step 2

VIEW

Step by step

Solved in 2 steps

SEE SOLUTION Check out a sample Q&A here

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.

Similar questions

Consider the below graph: E(R₁) E(RM) R₁ stocks M O stocks O What is the slope of the graph? If the historical return of an individual stock is lying the slope then the stock is undervalued or overvalued?
You are comparing Stock A to Stock B. Given the following information, what is the difference in the expected returns of these two securities? State of Economy Probability of State of Economy Rate of Return if State Occurs Stock A Stock B Normal .75 .13 .16 Recession .25 −.05 −.21
Consider an event study of the following stock. Realised return Market return t = 0 (event day) 0.1 0.1 t =1 0.06 0.04 t = 2 0.03 0.02 t = 3 0.015 0.01 Suppose that the estimated market model is . What is the CAR (cumulative abnormal returns) for t = 3?
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM Stock Rit Rmt ai Beta C 12 10 0 0.8 E 10 8 0 1.1 Rit = return for stock i during period t Rmt = return for the aggregate market during period t What is the abnormal rate of return for Stock C during period t using only the aggregate market return (ignore differential systematic risk)?
1) what is the expected return rate for stock A 2) what is the expected return rate for stock B 3) what is the standard deviation of returns for stock A 4) what is the standard deviation of returns for stock B.
1.Which of the following is assumed by the Black-Scholes-Merton model? A.The return from the stock in a short period of time is lognormal B.The stock price at a future time is lognormal C.The stock price at a future time is normal D.None of the above
Please assist with the below: Covariance with MPCorrelation with Market IndexBetaCAPM Req. ReturnValuation(Overvalued/Undervalued/Fairly Valued)Nature of stock(Aggressive/Defensive)
For part B, is it meant to be the expected return on the stock in all market conditions or should I be using the expected return depending on the market? e.g. instead of using 0.07 for each of the stocks, using 0.05, 0.06 and (0.04)
Fundamental analysis is a method of______________________________to determine intrinsic value of the stock.a. Measuring the intrinsic value of a security using the market indexb. Using qualitative and quantitative factorsc. Using statistical analysis such as standard deviation, coefficients and probabilitiesd. Using historical price movementse. B and C only
Q2) Consider the below graph: E(R₁) Ans: E(RM) R₁ stocks M O stocks O What is the slope of the graph? If the historical return of an individual stock is lying the slope then the stock is undervalued or overvalued? Ans: Slope of the Graph is called= B
Compute the abnormal rates of return for the following stocks during period t (ignore differential systematic risk): Stock % % % % BFT % B F T UE Rit = return for stock i during period t Rmt = return for the aggregate market during period t Use a minus sign to enter negative values, if any. Round your answers to one decimal place. ARBE: ARF: ARTI: ARC: AREL: с Rit 11.5% 9.2 12.5 12.5 15.9 Rmt 4.7% 6.2 6.6 15.2 11.1
3) The return on a stock, in a factor model, in a given period will be related to A) firm-specific events. B) macroeconomic events. C) the error term. D) both firm-specific events and macroeconomic events. E) neither firm-specific events nor macroeconomic events. 4) Assume the index model is valid, what inputs will be required to determine covariance between two assets? A) βk B) βL C) σM D) all of the options E) None of the options are correct.Choose the correct answer with justification.