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Required rate of return and investment strategy

You expect the risk-free rate (RFR) to be 5 percent and the market return to be 12.2 percent. You also have the following information about three stocks

Current Expected Expected
Stock Beta Price Price Dividend
X 1 26 26 0.75
Y 2 41.5 44 1.50
Z 2 50.00 58 0.95

What are the expected (required) rate of return for the three stocks?
What are the estimated rates of return for the three stocks?
What is your investment strategy concerning the three stocks?Discuss your decision?

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See the attached file for complete solution. The text here may not be copied exactly as some of the symbols / tables may not print. Thanks

You expect the risk-free rate (RFR) to be 5 percent and the market return to be 12.2 percent. You also have
the following information about three ...

Solution Summary

This posting calculates the required rate of return on three stocks and the current expected rate of return and suggests the correct investment strategy to take advantage of the mis-pricing on the stock market.

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