2. You discover an investment costing $2,500 which has an expected total return of 12% pa, but a required return of 14% pa. Of the 12% pa total expected return, the capital return is expected to be 8% pa. Assume that the required return of 14% remains constant, the dividends can only be re-invested at 14% pa and all returns are given as effective annual rates.

Which of the following statements is NOT correct?

a.

The investments price at time t=20, just after the dividend at that time is paid, would be $ 11,652.39

b.

You would use a discount rate of 12% pa to find the NPV of this investment

c.

The investment is currently over-priced

d.

When plotted on the Security Market Line, the investment would have a negative alpha.

e.

The expected dividend return is 4% pa