Suppose that we use S&P 500 portfolio as a proxy for the market portfolio. The expected...

 

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Suppose that we use S&P 500 portfolio as a proxy for the market portfolio. The expected rate of return for the S&P 500 portfolio for the upcoming year is 12%. The risk free one year T-bill has a rate of return of 5%. Suppose you consider stock A (a component of S&P 500). It is currently price at $40 in the market. The stock is expected to pay a dividend of $3 in the upcoming year and to sell then for $41. The stock risk has been evaluated at В = -0.5. Is the stock overpriced or underpriced in the market now? Would you overweight or underweight this stock in your risk portfolio compared to its weight in S&P 500 portfolio now? Suppose that we use S&P 500 portfolio as a proxy for the market portfolio. The expected rate of return for the S&P 500 portfolio for the upcoming year is 12%. The risk free one year T-bill has a rate of return of 5%. Suppose you consider stock A (a component of S&P 500). It is currently price at $40 in the market. The stock is expected to pay a dividend of $3 in the upcoming year and to sell then for $41. The stock risk has been evaluated at В = -0.5. Is the stock overpriced or underpriced in the market now? Would you overweight or underweight this stock in your risk portfolio compared to its weight in S&P 500 portfolio now?

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To determine whether stock A is overpriced or underpriced in the market we need to calculate its int... View the full answer