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(a) Within the context of the CAPM, the following forecasts are given: - Expected market return =12% - Beta of Stock XYZ = 1.35 -
(a) Within the context of the CAPM, the following forecasts are given: - Expected market return =12% - Beta of Stock XYZ = 1.35 - Expected market risk premium =5% - Forecast real risk-free rate =2% - Your forecast rate of return on Stock XYZ=11% - Forecast inflation rate =5% i) Using Jensen's alpha, determine whether Stock XYZ is currently underpriced, overpriced, or properly priced. Show all computations. ii) If the current market price of Stock XYZ is $100, what is the fair price of the stock (in terms of $ ) at equilibrium per CAPM, given the above information? Calculate. (b) Explain why the separation theorem is important (i) to investors, and (ii) to portfolio/asset managers
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