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?© BrainMass Inc. brainmass.com October 16, 2018, 8:23 pm ad1c9bdddf
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 provided to understand market efficiency. The low growth stocks are analyzed.
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?