Hi. I have some difficulties with this problem I hope someone can help me.
Market data are as follows:
E(Rm) = 10% and σm = 15%, risk-free rate = 5%
Shares
Epsilon-- Expected return 13% -- Standard deviation 19% -- Beta 1.3
Yalta-- Expected return 9.5%-- Standard deviation 12% -- Beta 0.9
1) Are the two titles correctly priced? If not, are they over or under priced?
2) As an addition to a well diversified portfolio, which title would you choose?
3) You would change your answer if the title was the only investment owned
For the first question i used CAPM and my solution is :
E(R epsilon)=5+1.3(10-5)
E(R epsilon)=11.5
E(R yalta)=5+0.9(10-5)
E(R yalta)=9.5
After that I don't know how I should continue.
Market data are as follows:
E(Rm) = 10% and σm = 15%, risk-free rate = 5%
Shares
Epsilon-- Expected return 13% -- Standard deviation 19% -- Beta 1.3
Yalta-- Expected return 9.5%-- Standard deviation 12% -- Beta 0.9
1) Are the two titles correctly priced? If not, are they over or under priced?
2) As an addition to a well diversified portfolio, which title would you choose?
3) You would change your answer if the title was the only investment owned
For the first question i used CAPM and my solution is :
E(R epsilon)=5+1.3(10-5)
E(R epsilon)=11.5
E(R yalta)=5+0.9(10-5)
E(R yalta)=9.5
After that I don't know how I should continue.