Stock Y has a beta of 1.0 and an expected return of 13.5 percent. Stock Z has a

Question

Stock Y has a beta of 1.0 and an expected return of 13.5 percent. Stock Z has a beta of .6 and an expected return of 9 percent. If the risk-free rate is 5.8 percent and the market risk premium is 6.8 percent, the reward-to-risk ratios for stocks Y and Z are 7.7 and 5.3 percent, respectively. Since the SML reward-to-risk is ?? percent, Stock Y is undervalued and Stock Z is overvalued. (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)

JUST need the SML reward to risk is ____?

Stock Y has a beta of 1.0 and an expected return of 13.5 percent. Stock Z has a beta of .6 and an expected return of 9 percent. If the risk-free rate is 5.8 percent and the market risk premium is 6.8 percent, the reward-to-risk ratios for stocks Y and Z are 7.7 and 5.3 percent, respectively. Since the SML reward-to-risk is ?? percent, Stock Y is undervalued and Stock Z is overvalued. (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)

JUST need the SML reward to risk is ____?

Explanation / Answer

The SML/ CAPM return for Stock Y = 5.8 + 1* 6.8 = 12.6%

SML Risk reward expected return for Z = 5.8 + 0.66 *1.8 = 9.88%

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