Under/Over Valued Stock A manager believes his firm will earn a 11.20 percent return next year. His firm has a beta of 1.38, the expected return on the market is 8.8 percent, and the risk-free rate is 3.8 percent. Compute the return the firm should earn given its level of risk and determine whether the manager is saying the firm is under-valued or over-valued. Multiple Choice A. 10.70%, over-valued B. 10.70%, under-valued C, 15.944%, over-valued D. 15.944%, under-valued
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.
Under/Over Valued Stock A manager believes his firm will earn a 11.20 percent return next year. His firm has a beta of 1.38, the expected return on the market is 8.8 percent, and the risk-free rate is 3.8 percent. Compute the return the firm should earn given its level of risk and determine whether the manager is saying the firm is under-valued or over-valued.
Multiple Choice
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