d. The covariance between the returns of AZA Ltd's shares and the returns of the market portfolio
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Question:
d. The covariance between the returns of AZA Ltd's shares and the returns of the market portfolio is 0.05. The standard deviation of the return of the market portfolio is 20%. The market risk premium is 4% and the riskfree return is 6%.
Di . Calculate the required return on the firm's shares. Show all calculations.
Dii. If the expected return based only on the constant dividend growth model is 12% are the shares correctly priced? If yes, explain why. If not, what would happen to the share price and why? (No calculations required.)
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