Consider this market situation:

 

Estimated Risk free rate = 1.47%

Estimated return on the Market portfolio = 8.52%

 

What is the equation of the Security Market Line? Could you demonstrate that graphically?

Consider the following stock in this environment:

 

Current Price = $33.63

Expected price in 12 months = $39.00 (by wide market consensus)

Beta = 1.5

The stock is expected to pay no dividends in the foreseeable future

 

What is the expected return of the stock at the current pricing?

 

What return would the CAPM pricing model (Security Market Line) suggest?

 

What does it tell you? Is the stock correctly priced? 

What is the equilibrium price, if the estimated Beta and the expected stock price are correct?

Is the stock currently overpriced or underpriced?