What would be its return of stock as predicted by the CAPM

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Reference no: EM132061132

Assume that stock P has a standard deviation of 50% and its correlation with the market is 0.8. The market’s standard deviation is 20%. The Market Risk Premium (Rm-Rf) is 7% and the risk free rate is 5%

1. What would be the beta of stock P?

2. What would be its return of stock P as predicted by the CAPM?

3. If the stock has an actual return of 18%, what is the alpha of this stock?

4. Is it under or over-valued? What would you do with this stock (sell/buy)?

5. Assume that you run a regression using CAPM to obtain the beta of stock P. The R2 of the regression is 0.4. How would you interpret this result?

Reference no: EM132061132

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