Suppose the risk-free return is 6 percent and market return is 14 percent. Answer the...
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Suppose the risk-free return is 6 percent and market return is 14 percent. Answer the questions with the aid of the following information:
Stock Price Today Expected Price after 1 year Expected dividend after 1 year Beta
1 100 125 20 0.8
2 70 77 10 1.7
3 98 104 4 1.2 4 185 190 30 2
a. Calculate the required rate of return using CAPM.
b. Find out whether each stock is undervalued or overvalued or properly valued.
c. If the risk-free return increases to 8, how (a) and (b) changes?
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