Stocks a and b are currently selling for 75 and 42, Ask an Expert

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Stocks A and B are currently selling for $75 and $42, respectively. Assume the expected return and the standard deviation of the market portfolio is 10% and 12%, respectively and the risk-free rate is 0.5%. The standard deviation for A and B are 18% and 14%, respectively; and the correlation of each stock with the market portfolio is 0.35 and 0.65. Suppose that you estimate a year-end target price of $78 and $46 for these stocks (NO DIVIDENDS ARE EXPECTED). Using CAPM as a benchmark, calculate the alpha for each stock and state whether the stocks are underpriced or overpriced.

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Financial Management, Finance

Category:- Financial Management
Reference No.:- M92810241

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