You discover an investment costing $1,000 which has an expected total return of 10% pa, but a required return of 12% pa. Of the 10% pa total expected return, the capital return is expected to be 7% pa. Assume that the required return of 12% remains constant, the dividends can only be re-invested at 12% pa and all returns are given as effective annual rates.

Which of the following statements is NOT correct?

a.

You would use a discount rate of 12% pa to find the NPV of this investment

b.

The expected dividend return is 3% pa

c.

The investment is currently over-priced

d.

When plotted on the Security Market Line, the investment would have a positive alpha.

e.

The investments price at time t=20, just after the dividend at that time is paid, would be $3,869.68