Logo
Home Study Material Contact Search
AI Chat FREE
  1. business
  2. accounting
  3. here are data on two companies. the t-bill rate is

Here are data on two companies. The T-bill rate is 4% and the market risk...

70.2K

Verified Solution

Question

Accounting

image

Here are data on two companies. The T-bill rate is 4% and the market risk premium is 6%. Company $1 Discount Store Everything $5 Forecasted return 12% 11% Standard deviation of returns 8% 10% Beta 1.5 1.0 a. What would be the fair return for each company according to the capital asset pricing model (CAPM)? Note: The expected return for a given asset, E(ri), is the return predicted by the CAPM for a given level of systematic risk. E(ri) = r+ Bi x [E (rm) rz], r7 is the risk-free rate (T-bill rate), Bi is Beta, Erm) is market risk premium. b. Characterize each company in the previous problem as underpriced, overpriced, or properly priced. Note: If the forecasted return is greater than the required rate of return, the security is currently undervalued, or selling at a price lower than its fundamental value. The higher the return, the lower the stock price. And the vice versa

Answer & Explanation Solved by verified expert
Get Answers to Unlimited Questions

Join us to gain access to millions of questions and expert answers. Enjoy exclusive benefits tailored just for you!

Membership Benefits:
  • Unlimited Question Access with detailed Answers
  • Zin AI - 3 Million Words
  • 10 Dall-E 3 Images
  • 20 Plot Generations
  • Conversation with Dialogue Memory
  • No Ads, Ever!
  • Access to Our Best AI Platform: Flex AI - Your personal assistant for all your inquiries!
Become a Member

Other questions asked by students