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7) Here are data on two companies. The risk-free rate is 4% and the market risk premium is 6%. Standard deviation of the market return
7) Here are data on two companies. The risk-free rate is 4% and the market risk premium is 6%. Standard deviation of the market return is 5%. Company Forecasted return Standard deviation Beta 12% 8% 1.5 Y 11% 10% 1.0 a) What would be the fair return for each stock according to the capital asset pricing model (CAPM)? (10 points) b) Discuss whether according to the CAPM each stock is overvalued, undervalued or fairly priced. Explain your answer. (5 points) c) What is the level of systematic and idiosyncratic for stock Y? (10 points) d) Discuss whether CAPM is doing a good job predicting expected return for stock X. (5 points)
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