Hello guys, I have a question and I found an answer but i needs more explanation and detailes please. Can you explain me part C as well in a different way than this one becuase it sounds counfsing to me

Assume a market return of 9% and the following information:

Security Expected Return Std Deviation

X 3.0% 0.0%

Y 12.0% 20.0%

A. Using the information listed above, write the beta-version SML equation of the CAPM.

B. Using the expected returns listed in the table above, calculate the beta for stock Y.

C. Given your answer, what can we expect about the return of stock Y if the market return is expected to fall by 2%

The answer:

Answer A.

Beta = 1.5 risk-free rate = 2% expected return on market = 10%

Required rate of return = risk-free rate + beta * (market return - risk-free rate) Required rate of return = 0.02 + 1.5 * (0.10 - 0.02) Required rate of return = 0.02 + 1.5 * 0.08 Required rate of return = 0.14 Required rate of return = 14.00%

Answer B.

According to Mr. Walker:

Constant growth rate, g = 8% Current dividend per share, D0 = $3 Required rate of return, r = 14.00%

D1 = D0 * (1+g) D1 = $3 * 1.08 D1 = $3.24

Price of Stock = D1 / (r - g) Price of Stock = $3.24 / (0.14 - 0.08) Price of Stock = $54.00

According to Mr. Daniels:

Growth rate for first 2 years = 9% Constant growth rate after 2 years, g = 4% Current dividend per share, D0 = $3 Required rate of return, r = 14.00%

D1 = $3 * 1.09 = $3.27 D2 = $3.27 * 1.09 = $3.5643 D3 = $3.5643 * 1.04 = $3.7069

P2 = D3 / (r - g) P2 = $3.7069 / (0.14 - 0.04) P2 = $37.069

Price of Stock = $3.27 / 1.14 + $3.5643 / 1.14^2 + $37.069 / 1.14^2 Price of Stock = $34.13

Answer C.

Current Price, P0 = $42 Constant growth rate, g = 8% Current Dividend, D0 = $3

D1 = $3 * 1.08 D1 = $3.24

Required rate of return = D1 / P0 + g Required rate of return = $3.24 / $42 + 0.08 Required rate of return = 15.71%

So, according to Mr. Walker expected rate of return is 15.71% whereas actual rate of return is 14.00%

Answer D.

Decision by Mr. Walker:

Mr. Walker expected a price of $54.00 but actual price of stock is $42. So, Mr. Walker should buy this stock.

Decision by Mr. Daniel:

Mr. Daniel expected a price of $34.13 but actual price of stock is $42. So, Mr. Walker should sell this stock.