Question
Your client is considering the two stocks described below. Assume for this question that the risk-free rate is 6%, the expected return on the market
Your client is considering the two stocks described below. Assume for this question that the risk-free rate is 6%, the expected return on the market is 14%, and the market's standard deviation is 18%.\ Stock A price per share = $18\ Stock A annual dividend = $2\ Stock A dividend growth rate = 3%\ Stock A Beta = 1.1\ Stock A standard deviation = 21%\ Stock A realized return over past 12 months = 15%\ Stock B price per share = $12\ Stock B annual dividend = $1.50\ Stock B dividend growth rate = 4%\ Stock B beta = 0.88\ Stock B standard deviation = 14%\ Stock B realized return over past 12 months = 12.5%\ Which stock would you recommend your client purchase, and why?\ Stock A, because its intrinsic value is greater than Stock B's.\ Stock A, because its required return is greater than Stock B's.\ Stock A, because its risk-adjusted return is greater than Stock B's.\ Stock B, because it is selling for less than its intrinsic value.
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