Suppose you have data that show the rates of return earned by Stock X, Stock Y, and

Question:

Suppose you have data that show the rates of return earned by Stock X, Stock Y, and the market over the last 5 years, along with the risk-free rate of return and the required return on the market. You also have estimates of the expected returns on X and Y.
a. How could you decide, based on these expected returns, if X and Y are good deals, bad deals, or in equilibrium?
b. Now suppose in year 6 the market is quite strong. Stock X has a high positive return, but Stock Y’s price falls because investors suddenly become quite concerned about its future prospects; that is, it becomes riskier, and like a bond that suddenly becomes risky, its price falls. Based on the CAPM and using the most recent 5 years of data, would Stock Y’s required return as calculated just after the end of Year 6 rise or fall? What can you say about these results?

Stocks
Stocks or shares are generally equity instruments that provide the largest source of raising funds in any public or private listed company's. The instruments are issued on a stock exchange from where a large number of general public who are willing...