59、An analyst gathered the following information about two common stocks:
| Easy
Company | Bravo
Enterprises | Estimated future rate of return | 12.0% | 11.5% | Beta | 1.25 | 1.00 |
If the risk-free rate of return is 5 percent and the market risk premium is 6 percent, the most appropriate conclusions about the value of the common stocks of Easy Company and Bravo Enterprises, respectively, are: | Easy Company common stock | Bravo Enterprises common stock | A. | Overvalued | Overvalued | B. | Overvalued | Undervalued | C. | Undervalued | Overvalued | D. | Undervalued | Undervalued |
A. Answer A B. Answer B C. Answer C D. Answer D
Correct answer = B
"An Introduction to Asset Pricing Models," Frank K. Reilly and Keith C. Brown
2008 Modular Level I, Vol. 4, pp. 263-267
Study Session 12-51-e
calculate, using the SML, the expected return on a security, and evaluate whether the security is overvalued, undervalued, or properly valued
The required rate of return for Easy is 5% + 1.25(6%) = 12.5%. The required return is greater than the estimated return, so the stock is overvalued. Bravo's required rate of return is 5% + 1(6%) = 11% (because the beta is 1.0, the return is the same as the market). The required return is less than the estimated return, so the stock is undervalued. | 
发表于 2008-5-27 15:49
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