Find out the stock current price

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Explain your answer. Lets say the CAPM holds & the market price of a stock is $P0ERj0RfR Rmf, the stock's expected rate of return is (), the riskless rate of interest is , and the market risk premium is E( )- R .

Q1.a What will be the stock's current price if its expected future payoff remains the same but the covariance of its rate of return with the market portfolio doubles?

The market portfolio's expected rate of return is E(Rm ), the riskless rate of interest is Rf and the standard deviation of the return on the market portfolio is (Rm).

Q1.b Would you recommend investment in a stock with an expected rate of return of E(Rj )and a covariance of its return with the market return of Cov(R Rj, m ).

Q1.c Suppose that in the nest period the return on the stock was only Rj1 over the preceding period. how would you explain this ex-post return?

Reference no: EM133072681

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