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Stock X Stock Y Stock Z Beta -- 0.65 0.90 Current price $13.50 $26.5 -- Correlation (X/Y) = 0.35 (X/Z) = 0 (Y/Z) = 0.55
Stock X | Stock Y | Stock Z | |
Beta | -- | 0.65 | 0.90 |
Current price | $13.50 | $26.5 | -- |
Correlation | (X/Y) = 0.35 | (X/Z) = 0 | (Y/Z) = 0.55 |
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Most equity research concludes that Stock X is much more volatile compared to the market. On average, Stock Xs volatility is about 1.5 times that of the stock market. Based on CAPM, estimate the required return of Stock X. (5 marks)
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b) It is expected that Stock Y will pay a per share dividend of $0.43 one year from now, and the dividend will increase by an average of 6% per year in the foreseeable future. According to CAPM, is Stock Y overvalued or undervalued? (9 marks)
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