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liubo4ka [24]
3 years ago
13

The expected return on the market portfolio is 13%. The risk-free rate is 6%. The expected return on SDA Corp. common stock is 1

2%. The beta of SDA Corp. common stock is 1.50. Within the context of the capital asset pricing model, _________.A) SDA Stock is underpricedB) SDA stock is fairly pricedC) SDA Corp. stock's alpha is
Business
1 answer:
schepotkina [342]3 years ago
5 0

Answer: C) SDA Corp. stock's alpha is -4.5%

Explanation:

Calculate the required return using the Capital Asset Pricing Model.

= risk free rate + beta ( market return - risk free rate)

= 6% + 1.5 (13% - 6%)

= 6% + 10.5%

= 16.5%

The expected return on the stock is 12% yet the required return is 16.5%. This means that this stock is overpriced because it is giving a return less than what it should be giving.

The alpha is therefore;

= Expected return - Required return

= 12% - 16.5%

= - 4.5%

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The amount of  dollars that  it would cost to buy an edinburgh sweaters if the exchange rate is 1.50 dollars per one british pound is: $75.

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