1. Under/Over Valued Stock A manager believes his firm will earn a 11.05 percent return next year. His firm has a beta of 1.37, the expected return on the market is 8.7 percent, and the risk-free rate is 3.7 percent. Compute the return the firm should earn given its level of risk and determine whether the manager is saying the firm is under-valued or over-valued.
10.55%, over-valued
15.619%, under-valued
15.619%, over-valued
10.55%, under-valued
2. Stock ABC has a standard deviation of 25% and a beta of 0.5.
Stock XYZ has a standard deviation of 20% and a beta of 1.
The risk-free rate is 5% and the expected return for both stocks is 15%.
Which stock should have the higher expected return?
Which stock has best reward to risk ratio?
Which stock has the most total risk?