7 (Lecture note pages 27-28, pages 37-42, Recitation exercises) In prston wesasa

Question

7 (Lecture note pages 27-28, pages 37-42, Recitation exercises) In prston wesasaly use S&P; 500 index's return as merket retun The covarance between YOK) stock and thn S&P; 500 rdexa o os Tho stand rd devron of dw "ock-des-20% ie, the variance of the stock market s 004 a What is the beta of YOHO? (O 5) Answer b lrthe expected return of S&P; 500 nde. 5% and current ruk tee rate (T-bd) a 3%, wht the espected return of YOHO shock Keordruto CAPM, (0 5) Answer c B 1 acordry to your research, you believe YOHO stock's actual expected return a l0 Is ths stock overvaled or udervalued? (0 S) Answer Overvalued Undervalued

Explanation / Answer

Question - a

Beta = Covariance / Variance of market = 0.05 / 0.04 = 1.25

Question - b

Expected rate of return on YOHO stock = Rf + Beta ( Rm - Rf) = 3 + 1.25 ( 5 - 3) = 5.5%

Question - c

Under valued

Actual expected return which is measured by taking value of the stock in denominator, shall produce higher percentage then 5.5% if such stocks are under valued to their intrinsic value.

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