Stock y has a beta of 130 and an expected return of 146...

Stock Y has a beta of 1.30 and an expected return of 14.6 percent. Stock Z has a beta of 0.75 and an expected return of 11.3 percent. Required: If the risk-free rate is 5.00 percent and the market risk premium is 7.50 percent, are these stocks correctly priced? in other words is stock Y undervalued, overvalued, or correctly price, is stock X undervalued, overvalued ,or correctly priced?

Transcript

00:01 In the given question, we have to find out for the two stocks that is given to us, that is stock vying stock jet, which stock is undervalued and overvalued.

00:10 So a stock will be undervalued when the given expected rate of return or we can say the given expected return rate is lesser than the calculated or we can say the actual return rate.

00:36 Return rate and the stock will be overvalued when the given interest rate or we can say the given expected rate actually the given expected return rate is more than the calculated or the actual return rate so under these two circumstances we can classify or we can judge whether the stock has a been undervalued or overvalued.

01:15 So what we will be doing, first of all, we will be calculating the actual return rate of the stock y and z.

01:23 So the first step will be the calculation of actual return rate.

01:40 And for calculating this actual return rate, we will be using capital asset pricing model.

01:52 Now, under capital asset pricing model, the required return rate or we can say the return rate is the risk free rate denoted with rf plus the beta of the stock times the market risk premium that is r m minus rf now where this r f is the r r r r r free rate the beta will be the beta of given stock and this r m minus r f is the market risk premium so let's see how we are going to calculate the actual return rate.

02:50 Now we have two stock.

02:52 That is first of all, we have stock y.

02:59 Now, it is given that the risk -free rate, or we can say rf, is 5%, and the market risk premium denoted with rm minus rf is said to be 7 .5%.

03:35 And the beta of stock, that means beta of stock y, is said to be 1 .3.

03:50 So now we can easily calculate the expected return.

03:54 So the expected return using capital asset pricing model is rf plus beta of the stock times the market fix premium.

04:08 So the risk free rate is 5 % plus the beta of the stock is 1 .4%.

04:14 3 and the market fix premium that is r minus rf is given to be 7 .5%.

04:21 So now if we calculate this then the value comes to 5 % plus 9 .75%...