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 Summary
The solution calculates the stocks represent buying opportunities and which stocks should be sold.
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ANSWERS
See the attached file.
First, determine the rate of return for each of the investments using the capital asset pricing model.
Security Expected ...
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