Question
An analyst in a daily business segment broadcasted on the national TV quoted the following statement: Looking at the historical market prices of AB and
An analyst in a daily business segment broadcasted on the national TV quoted the following statement:
"Looking at the historical market prices of AB and CD stocks, we find that AB have been on an average traded at Rs. 120 for last three years, indicating low beta because its price moved very little. On the other hand, CD stock showed that it has been traded at a high of Rs. 1050 and a low of Rs. 550 (its current market price) during the same time period as stock AB. Thus, CD stock has shown large variation in terms of its stock prices indicating a high beta." Do you agree with his statement? Explain.
part b) There are two stocks i.e. Stock OP and Stock QP. The beta of Stock OP and Stock QP is 1.35 and 0.80 respectively. Moreover, the expected return of Stock OP is 14 percent and that of Stock QP is 11.5 percent. Assume that the T-bills rate is 4.5 percent and the KSE-100 index's risk premium is 7.3 percent. Show calculations to check if these two stocks are correctly priced?
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