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Exp. Return on Market = 25% and Std. Deviation of Market = 20%. The risk free rate of return is 5%. A stock has a beta of 1.25 and is priced at $100. Everyone expects that by the end of one year the stock which pays no dividend will trade at $138.00. You believe in the forecast as well as in the validity of the SML relation. (a) Is this stock fairly priced and does its expected return lie along the SML line. (b) If you think that the stock is mispriced, what should be its fair value price?

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Financial Management, Finance

Category:- Financial Management
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