Question: The table below contains information based on an analysts forecasts for three stocks being traded at the Nairobi securities exchange in Kenya. The Kenyan Treasury

The table below contains information based on an analysts forecasts for three stocks being traded at the Nairobi securities exchange in Kenya. The Kenyan Treasury bill rate is 7% and the market return is 15%.

Stock

Price Today (Ksh)

Price at the end of year 1 (Ksh)

Dividend per share at end of year 1 (Ksh)

Beta factor

A

25

27

1.00

1.0

B

40

45

2.00

0.8

C

15

17

0.50

1.2

Required

  1. An analysis of expected return and required return on each stock

(6 marks)

  1. Determine whether each stock is undervalued, overvalued or correctly valued (3 marks)
  2. Outline an appropriate trading strategy for each stock (3 marks)
  3. Using a graphical analysis, identify the mispriced securities (5 marks)
  4. Evaluate the performance of each stock using Jensens ratio (3 marks)

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