Question
You discover an investment costing $2,000 which has an expected total return of 13% pa, but a required return of only 9% pa. Of the
You discover an investment costing $2,000 which has an expected total return of 13% pa, but a required return of only 9% pa. Of the 13% pa total expected return, the capital return is expected to be 7% pa. Assume that the required return of 9% remains constant, the dividends can only be re-invested at 9% pa and all returns are given as effective annual rates. Which of the following statements is NOT correct?
a. The investment is currently under-priced
b. You would use a discount rate of 13% to find the NPV of this investment
c. The investments price at time t=20 would be $7,739.37
d. The expected dividend return is 6% e. When plotted on the Security Market Line, the investment would have a positive alpha.
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