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mario62 [17]
3 years ago
9

Stock Y has a beta of 1.30 and an expected return of 14.9 percent. Stock Z has a beta of .95 and an expected return of 12.8 perc

ent.
If the risk-free rate is 5.20 percent and the market risk premium is 7.70 percent, are these stocks overvalued or undervalued?
Business
1 answer:
Sever21 [200]3 years ago
6 0

Answer:

Stock Y is overvalued and Stock Z is undervalued.

Explanation:

The stock is fairly valued when the required rate of return on the stock is equal to its expected return. If the expected return on the stock is more than the required rate of return, the stock is undervalued and vice versa.

The required rate of return on the stock is calculated under the CAPM approach suing the following formula.

r = rRF + Beta * rpM

Where,

  • rRf is the risk free rate
  • rpM is the risk premium on market

r of Stock Y = 0.052 + 1.3 * 0.077  =  0.1521 or 15.21%

The required rate of return of Stock Y (15.21%) is more than its expected rate (14.9%) which means the stock is overvalued.

r of Stock Z = 0.052 + 0.95 * 0.077 = 0.12515 or 12.515%

The required rate of return of Stock Z (12.515%) is less than its expected rate (12.8%) which means the stock is undervalued.

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Cheers.

3 0
3 years ago
"Tariffs and other trade restrictions increase the domestic scarcity of products from abroad. Such policies benefit domestic pro
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liraira [26]

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2 years ago
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3 0
2 years ago
1. You have been asked to appraise the market value of a three-bedroom house with two bathrooms that is going to be sold tomorro
Elan Coil [88]

Answer:

Current price of house = $222,000

Explanation:

given data

property that sold = $275,000

values decreasing at rate = $2,000 per week

Each bedroom = $30,000

a bathroom  = $15,000

solution

we get here Price of 3 bedroom & 3 bathroom house (4 weeks ago) is

Price of 3 bedroom & 3 bathroom house (4 weeks ago) = $275,000 - $30,000 - $15,000

Price of 3 bedroom & 3 bathroom house (4 weeks ago)  = $230000

and

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so

Current price of house = $230000 - $8,000

Current price of house = $222,000

8 0
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