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Ivanshal [37]
2 years ago
13

Stock Y has a beta of 1.2 and an expected return of 12.1%. Stock Z had a beta of 0.8 and an expected return of 7.85%. The risk-f

ree rate is 2.4% and the market risk premium is 7.2%. Are these stocks correctly priced
Business
1 answer:
levacccp [35]2 years ago
6 0

Answer:

Since the expected return and required return are different for both Stock X and Z, we say that they are not correctly priced

Explanation:

<em>To determine whether or not the stocks are correctly priced ,</em>

<em>we have to compare the r</em><em>equired return</em><em> and the </em><em>expected return on each of them.</em>

Required return = Rf +β (Rm-Rf)

Note that Rm-Rf  is also known as market risk premium

                                  <em>Stock Y                         Stock Z</em>

<em>Required return   </em>       2.4% + 1.2(7.2%)            2.4% + 0.8(7.2%)

                                  = 11%                                   = 8.2%

<em>Expected return</em>            <em>12.1%                           7.85%</em>

Since the expected return and required return are different for both Stock X and Z, we say that they are not correctly priced

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