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Expected Return Volatility Beta: Determine which stocks should be bought or sold

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2. Assume that the CAPM is a good description of stock price returns. The market expected return is 7% with 10% volatility and the risk-free rate is 3%. New news arrives that does not change any of these numbers but it does change the expected return of the following stocks:

Expected Return Volatility Beta

Green Leaf 12% 20% 1.5
NatSam 10% 40% 1.8
HanBel 9% 30% 0.75
Rebecca Automobile 6% 35% 1.2

a. At current market prices, which stocks represent buying opportunities?
b. On which stocks should you put a sell order in?

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Solution Preview

See the attached file.

First, determine the rate of return for each of the investments using the capital asset pricing model.

Security Expected ...

Solution Summary

The solution calculates the stocks represent buying opportunities and which stocks should be sold.