Homework Answers
return on the stock = r
equating the future payouts to present price:
40 = 41/(1 + r) + 3/(1 + r)
r = 10%
Expected return = rf + beta x (E(rm) - rf) = 5% - 0.5 x (12% - 5%) = 1.5%
Therefore, the asset is underpriced (r > expected return)
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