Solution-What is risk-adjusted required return

Two stocks each pay a $1 dividend that is growing annually at 4 percent.

Stock A's beta = 1.3; stock B's beta = 0.8.

a. Which stock is more volatile?

b. If Treasury bills yield 2 percent and you expect the market to rise by 8 percent, what is your risk-adjusted required return for each stock?

c. Using the dividend-growth model, what is the maximum price you would be willing to pay for each stock?

d. Why are their valuations different?

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