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# Expected return

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In an efficient market, a group of high growth stocks is expected to provide a higher expected return than a group of low growth stocks. Is this true or false?

https://brainmass.com/economics/finance/understanding-market-efficiency-147832

#### Solution Preview

It is a very tricky question.

The statement is false. The discounting rate for a high growth stock is higher than the low growth stock and given the same ...

#### Solution Summary

Solution provided to understand market efficiency. The low growth stocks are analyzed.

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## Compute the expected returns for both securities.

1). Consider the following data for two risk factors (1 and 2) and two securities (J and L).
rf = 0.05 bJ1 = 0.80
rm1 = 0.02 bJ2 = 1.40
rm2 = 0.04 bL1 = 1.60
bL2 = 2.25

a. Compute the expected returns for both securities.
b. Suppose that security J is currently priced at \$22.50 while the price of security L is \$15.00. Further, it is expected that both securities will pay a dividend of \$0.75 during the coming year. What is the expected price of each security one year from now?

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