Q4.3Question 4.3

5 Points

Penske Ltd has a standard deviation of returns of 18% and a correlation with the market portfolio of 0.8. The market portfolio's expected return is 14%, its standard deviation of returns is 12%, and the riskfree rate of return is 6%. Calculate the equilibrium return on the company's shares. Show all calculations. If the expected return based only on the variable dividend growth model is 14% are the shares correctly priced? If not, what would happen to the share price and why? (No calculations required.)