Question 1. How are the SML and the CAPM related (Draw the appropriate graphs and explain)?
Question 2. A stock's current dividends are $1.50 and its expected to grow at 10 percent annually. Suppose its required rate of return equals 15 percent. The stock's recent market price is $120. What is its intrinsic value? Would you invest in the stock using fundamental analysis?
Please see attached file:
Question1. How are the SML and the CAPM related? (Draw the appropriate graphs and explain)?
CAPM (Capital Asset Pricing Model) equation is:
r A= r f + beta A (r m - r f)
r A = required/ expected return on any security or portfolio
r f = risk free rate
beta A =beta of any security
rm = return on market portfolio
The CAPM equation thus says that the expected return on any security or portfolio is equal to the risk-free rate plus a risk premium. The CAPM equation shows that ...
Discusses Security market Line and Capital Asset Pricing Model and calculates the intrinsic value of a stock.