Question
You discover an investment costing $3,000 which has an expected total return of 15% pa, but a required return of only 11% pa. Of the
You discover an investment costing $3,000 which has an expected total return of 15% pa, but a required return of only 11% pa. Of the 15% pa total expected return, the capital return is expected to be 8% pa. Assume that the required return of 11% remains constant, the dividends can only be re-invested at 11% pa and all returns are given as effective annual rates.
Which of the following statements is NOT correct?
a.
The investments price at time t=20 would be $49,099.61
b.
When plotted on the Security Market Line, the investment would have a positive alpha.
c.
The investment is currently under-priced
d.
The expected dividend return is 7%
e.
You would use a discount rate of 11% to find the NPV of this investment
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