Given the following information: Stock Beta Expected Return (%) ABC 1.4 12 XYZ 0.7 10 Risk-free...

  

 

 

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Given the following information: Stock Beta Expected Return (%) ABC 1.4 12 XYZ 0.7 10 Risk-free rate of return: 3% Expected market return: 12% Based on the information above, answer the following questions: (a) Explain the concept of beta in relation to the Capital Asset Pricing Model (CAPM). (4 marks) (b) Identify the stock that would be preferred by an investor in a bearish stock market with justification. (2 marks) (c) Based on CAPM, calculate the required rate of return for stock ABC and stock XYZ, respectively. (6 marks) (d) Evaluate the above stocks by using the Security Market Line (SML) and determine whether the stocks are undervalued or overvalued. (8 marks) [Total: 20 marks] Given the following information: Stock Beta Expected Return (%) ABC 1.4 12 XYZ 0.7 10 Risk-free rate of return: 3% Expected market return: 12% Based on the information above, answer the following questions: (a) Explain the concept of beta in relation to the Capital Asset Pricing Model (CAPM). (4 marks) (b) Identify the stock that would be preferred by an investor in a bearish stock market with justification. (2 marks) (c) Based on CAPM, calculate the required rate of return for stock ABC and stock XYZ, respectively. (6 marks) (d) Evaluate the above stocks by using the Security Market Line (SML) and determine whether the stocks are undervalued or overvalued. (8 marks) [Total: 20 marks]