If an investment’s expected return (mean return) does not plot on the SML, what does it show? Identify undervalued/overvalued investments from the graph.
If an investment’s expected return (mean return) does not plot on the SML, what does it show? Identify undervalued/overvalued investments from the graph.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Question
If an investment’s expected return (mean return) does not plot on the SML, what does it show? Identify undervalued/overvalued investments from the graph.
Transcribed Image Text:A
1 Security
2 Payup
3 T-bill
4 Rubber made
5 Market Index
6 Philips
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
B
Beta
-0.88
0
0.74
1
1.32
с
CAPM Return Expected Return
D
-0.02%
7%
12.89%
15%
17.54%
2.07%
7.00%
19.60%
15.00%
16.90%
E
F
CAPM Return Expected Return
2.07%
-1 Payup
H
-0.5
I
J
25.00%
20.00%
15.00%
10.00%
7.00%
5.00%T-bill
0.00%
-5.00%
Chart Title
0
K
Beta
L
0.5
M
19.60%
→→→CAPM Return Expected Return
Rubber made
15.00%
Market Index
N
1
16.90%
Philips
O
15
Transcribed Image Text:1 Security
2 Payup
A
3 T-bill
4 Rubber made
5 Market Index
6 Philips
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
B
Beta
-0.88
0
0.74
1
1.32
Expected Return
-0.02%
7.00%
12.89%
15.00%
17.54%
D
E
F
EXPECTED RETURN
-1
G
H
Payup, Expected Return, -
0.88,-0.02%
-0.5
I
20.00%
18.00%
16.00%
14.00%
12.00%
10.00%
8.00%
6.00%
4.00%
2.00%
0.00%
-2.00%
J
0
K
SML
bill, Expected Return, 0,
7.00%
BETA
0.5
L
M
N
1
O
Philips, Expected Return,
152,17.54%
Rubber made, Expected
Return, 0.74, 12.89%
Market Index, Expected
Return, 1, 15.00%
1.5
P
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