Raj Shankar is a security analyst who uses the capital asset pricing model (CAPM) to determine the fair valuation for stocks. Recently, Shankar examined the prospects for Mini Software Solutions (MSS), a small software company operating in Southern California. Shankar makes the following forecasts for MSS and for the broad market:
- Shankar’s forecasted return for MSS: 11%
- Shankar’s forecasted beta for MSS: 1.25
- Expected return on the stock market index: 12%
- Risk-free rate: 4%
Using his framework of analysis, Shankar should derive the following expected return and buy/sell recommendation for MSS:
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Expected Return |
Recommendation |
The equation for the (CAPM) is: E(R) = RF + β[E(Rm) – RF] = 0.04 + 1.25[0.12 – 0.04] = 0.14 = 14%.
Shankar’s forecasted (11%) is less than the equilibrium expected (or required) return for MSS. Therefore, Shankar should make a sell recommendation on the stock.
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发表于 2010-4-14 15:22
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