In Q103, why didn’t we calculate annual return of 3-months T bill yield
Share
Please briefly explain why you feel this question should be reported.
Please briefly explain why you feel this answer should be reported.
Please briefly explain why you feel this user should be reported.
Not sure but it seems that the rate given in the question is annualized rate, please confirm. Thank you.
Any returns given are annually stated so we need not calculate annual yield.
Anyways, stock price under CAPM should have been 23.31 whereas stock price 1 year from today will be 55
The stock is overvalued.
23.31 is the expected return of the securuty calculated using CAPM. Stock ka P0 is correct only in the question and it is fairly valued.
Ashish, 1st part of the ans is correct.
However in the 2nd part we need to compare the expected return ie HPR with required rate of return (using CAPM) to determine whether the stock is undervalued or overvalued or fairly valued.
So in CAPM the required rate of return is 23.31% which you already calculated. And the HPR is (55-45)/45= 22.22%.
So required rate of return is 23.31% and expected return is 22.22% ( HPR<Re) so the stock is overvalued by ( 23.31-22.22)= 1.09%( approx)
Thanks