Question
Given the following, calculate alpha, determine if the stock is over or under priced, and if a trader should buy or sell: Assume that the
Given the following, calculate alpha, determine if the stock is over or under priced, and if a trader should buy or sell:
Assume that the risk-free rate of return = 3%
Assume that the market risk premium = 7%
| Stock | Stock's Beta | Expected Return of Stock | Alpha (%) | Under or over priced? | Buy or sell? |
| A | 0.5 | 7% | |||
| B | 1.5 | 13% | |||
| C | 2.0 | 18% |
Use CAPM to calculate your required benchmark return in each case.
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Understanding financial statements
Authors: Lyn M. Fraser, Aileen Ormiston
9th Edition
136086241, 978-0136086246
