Question
Use the following information to answer the next two questions Here are the data on two companies. The T-bill rate is 4% and the market
Use the following information to answer the next two questions
Here are the data on two companies. The T-bill rate is 4% and the market risk premium is 7.5%
Company | $2 Below Store | Everything $1 store |
Forecasted Return | 10% | 12% |
Standard Deviation of Return | 6% | 8% |
Beta | 1.1 | 0.85 |
Question 1
What would be the expected returns for each company, according to the CAPM?
Question 1 options:
9.85% for $2 below store and 10.38% for Everything $1 store | |
15.88% for $2 below store and 12.22% for Everything $1 store | |
13.85% for $2 below store and 12.22% for Everything $1 store | |
12.25% for $2 below store and 10.38% for Everything $1 store |
Which of the following is correct regarding the company's stock value?
Question 2 options:
$2 below store is overvalued because the forecasted return is lower than CAPM return. | |
$2 below store is undervalued because the forecasted return is lower than CAPM return. | |
Everything $1 store is overvalued because the forecasted return is higher than CAPM return. | |
Everything $1 store is undervalued because the forecasted return is equal to the CAPM return. |
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