From the following information calculate Beta for stock A, required return of stock A as per CAPM and comment whether the stock is undervalued or overvalued. state that stock will lie above/below Security Market Line. Justify the answer.
Risk and return
Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary.
Capital Asset Pricing Model
Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.
From the following information calculate Beta for stock A, required return of stock A as per
state that stock will lie above/below Security Market Line. Justify the answer.
|
Expected return for the market |
15% |
|
Standard deviation of the market return |
25% |
|
Risk-free |
8% |
|
Correlation coefficient between stock A and the market |
0.8 |
|
Standard deviation for stock A |
30% |
|
Expected return for the stock |
16% |
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