Question
6. You strongly believe in the CAPM and have recently identified a stock that you estimate to have a Beta of 1.5. At the same
6.
You strongly believe in the CAPM and have recently identified a stock that you estimate to have a Beta of 1.5. At the same time you observe that the one year US Treasury bill yield is 0.8% and know that the average annual return to the SPY ETF has been 7% per year. Given that this stock has consistently earned about 10% per year then which of the following statements are likely true?
Select one or more:
a.
I should short this stock
b.
I should long this stock
c.
I feel this stock to be overvalued
d.
I feel this stock to be undervalued
e.
I need to assume the SPY is a decent proxy for the entire market in order to have necessary inputs
f.
I need to assume stationarity of returns in order to make a decision with this model
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