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The portfolio beta of an investment fund is currently 0.80. The risk-free rate is 5% and the expected market return is 14%. A portfolio manager
- The portfolio beta of an investment fund is currently 0.80. The risk-free rate is 5% and the expected market return is 14%. A portfolio manager is forecasting a return of 20% on a stock with beta 1.5.
- Based on the CAPM model (which gives the equilibrium return) and the analysts estimate try to explain if the stock is currently correctly priced (e.g. not over or under-priced) in the market.
- Now, if the stock was correctly priced (analyst estimate coincides with the CAPM), should the portfolio manager still invest into such stock? Why or Why not?
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