Question
Answer the following questions using the data in the following table. Stock A Stock B Risk free borrowing and lending Market Index Expected Return 6%
Answer the following questions using the data in the following table.
| Stock A | Stock B | Risk free borrowing and lending | Market Index |
Expected Return | 6% | ??? | 3% | 6% |
Standard deviation of return | 18% | 12% | 0% | ??? |
Beta | 1.5 | 1.0 | 0.0 | 1.0 |
a) What are the CAPM implied return of stock A and B?
b) It is known that Stock B sits on the Security Market Line (SML). What is the markets expected return on Stock B? Is Stock B fairly priced, underpriced or overpriced?
c) Can you determine the value of the standard deviation of the market index? If possible, what is the value? If not possible, what is your educated guess about the value?
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started