The expected returns and Beta of three stocks are given below Stock A B C Expected Return (%) 20 13 17 Beta Factor 1.9 0.8 1.4 If the risk-free rate…
CA Final · Advanced Financial Management · MTP · May 2024
The expected returns and Beta of three stocks are given below Stock A B C Expected Return (%) 20 13 17 Beta Factor 1.9 0.8 1.4 If the risk-free rate is 9% and the expected rate of return on the market portfolio is 14%, examine which of the above stocks are over, under or correctly valued in the market? What shall be the strategy?
Suggested Answer and Working Notes:
Required Rate of Return is given by Rj = Rf + β (Rm-Rf) For Stock A, Rj = 9% + 1.9 (14% - 9%) = 18.50%Stock B, Rj = 9% + 0.8 (14% - 9%) = 13.00%Stock C, Rj = 9% + 1.4 (14% - 9%) = 16.00% Required Return % Expected Return % Valuation Decision 18.50% 20.00% Under Valued Buy 13.00% 13.00% Correctly Valued Hold 16.00% 17.00% Under Valued Buy
Topics: Portfolio Management
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