Financial Management - Applying the CAPM to determine market attractiveness.

Feb 3rd, 2012
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Liberty University
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Annie is curious to know whether the following 5 stocks are appropriately valued in the market. Accordingly, she creates a table (shown below) listing the betas of each stock along with their ex-ante expected return values that have been calculated using a probability distribution. She also lists the current risk-free rate and the expected rate of return on the broad market index. Help her out and state your steps. Stock Expected Return Beta 1 22% 1.8 2 8% 0.9 3 14% 1.2 4 10% 1.1 5 16% 1.4 Rf 3.5% ---- Rm 15% 1.0

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