You have been employed as a financial analyst and have been asked to estimate the required rate
Question:
You have been employed as a financial analyst and have been asked to estimate the required rate of return on a stock of a firm with high market capitalisation and with growth potential. You have estimated that the risk-free rate is 4% p.a. and the expected return on the market portfolio is 11% p.a. The stock you are evaluating has a market beta of 1.4. The appropriate expected rate of return of this stock would be...
a.
greater than 13.8% if the Fama and French three-factor model holds.
b.
smaller than 13.8% if the Fama and French three-factor model holds.
c.
15% if the CAPM holds.
d.
greater than 15% if the CAPM holds.
e.
13.8% p.a. if the Fama and French three-factor model holds.
Financial Reporting Financial Statement Analysis and Valuation a strategic perspective
ISBN: 978-1285190907
8th edition
Authors: James M. Wahlen, Stephen P. Baginski, Mark Bradshaw