Question
Consider the following expectations for the market and two stocks in two possible equally likely states: State Market Return Stock A Stock B Boom 25%
Consider the following expectations for the market and two stocks in two possible equally likely states:
| State | Market Return | Stock A | Stock B |
| Boom | 25% | 38% | 12% |
| Recession | 5% | -2% | 6% |
a. What is the expected return on each stock?
b. Given that the risk-free rate is 6%, draw the Security Market Line (SML) for this economy, and plot the two securities on the graph given that you have computed Stock A has a of 2 and Stock B has a of 0.3.
c. Assuming that the CAPM holds, state for each of the two stocks if the stock is overvalued, correctly priced, or undervalued according to CAPM?
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Bitcoin Cash What You Need To Know About Bch
Authors: Alexander O. M.
1st Edition
1976721229, 978-1976721229
