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.
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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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