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The table below contains information based on an analysts forecasts for three stocks. The risk free rate is 8% and the market return is 16%.
The table below contains information based on an analysts forecasts for three stocks. The risk free rate is 8% and the market return is 16%.
| Stock | Current stock price (Ksh) | Expected stock price after 1 year (Ksh) | Expected dividend after 1 year (Ksh) | Beta factor |
| P | 25 | 27 | 1.00 | 1.00 |
| Q | 40 | 45 | 2.00 | 0.80 |
| R | 15 | 17 | 0.50 | 1.20 |
Required
- Compute the expected return on each stock
- Compute the required return on each stock
- Determine whether each stock is undervalued, overvalued or correctly valued
- Outline an appropriate trading strategy
- What are the limitations of the capital asset pricing model when used to make investment decisions
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