Expectations for the market and two particular stocks

Assignment Help Financial Management

Reference no: EM131996015

1) Consider the following expectations for the market and two particular stocks in two possible equally likely states:

State Market Return Stock A Stock B

Boom 25% 38% 12%

Recession 5% -2% 6%

a. What is the beta of each stock? Remember that beta can be computed as the covariance of the stock’s return with the market return divided by the variance of the market return.

b. What is the expected return on each stock?

c. Given that the risk-free rate is 6%, draw the Security Market Line (SML) for this economy, and plot the two securities on the graph.

d. Assuming that the CAPM holds, by how many percentage points are the securities located above or below the security market line? State for each of the two stocks if the stock is overvalued, correctly priced, or undervalued according to CAPM?

Reference no: EM131996015

Questions Cloud

How did you feel about it the first time you saw it : Why it is there, and what (or who) does it represent? What was the source of the funding for this artwork?

What is the value of the stock and stock price : If the required return on the preferred stock is 8.00 percent, what is the value of the stock? What’s the stock price?

Price paid to the bondholder if issuer calls bond : Assuming a par value of $1,000, what is the price paid to the bondholder if the issuer calls the bond?

Financed at caribbean target debt-to-equity ratio : Assuming that the project will be financed at Caribbean’s target debt-to-equity ratio, should the company invest in the project?

Expectations for the market and two particular stocks : Consider the following expectations for the market and two particular stocks in two possible equally likely states:

The expected return on the market portfolio : Given that the expected return on the market portfolio is 8% and the risk-free rate is 3%, which projects would you accept and why?

Calculate best-case and worst-case npv figures : Calculate the best-case and worst-case NPV figures.

Define an abstract class called staff : Define an abstract class called Staff with the following fields and methods: Fields: name, id, position representing the name, staff id and the position.

Determine which gasses will diffuse slower : What metric are you using to determine which gasses will diffuse slower? What does molar mass have to do with it? Is there and equation you're referencing?

User Account

All Pages