Your analysis indicates that the stock of Dewey Cheatham and Howe Industries will return 10% next...
- Your analysis indicates that the stock of Dewey Cheatham and Howe Industries will return 10% next year. The stock has a beta of 1.5, the risk free rate is 4% and the expected market risk premium is 5%. Is the stock over-valued, undervalued, or fairly valued? Explain.
Homework Answers
As per CAPM required return is equal to:
=Rf+beta(Risk premium)
=4%+1.5*(5%)
=11.5%
CAPM required a return of 11.5% whereas the expected return is 10%, meaning the stock is overvalued and should not be bought.
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