Answer :
Answer:
The stock is correctly valued.
Step-by-step explanation:
Whenever the expected return is lower than the required return; the stock is said to be undervalued, when the expected return is higher than the required return; the stock is said to be overvalued, and when the expected return is equal to the required return; the stock is said to be correctly valued .
The required rate of return = Risk free rate+Beta*Market risk premium
The required rate of return = 3 + (0.8*10) = 11%
From the above calculation, the required rate of return rate is 11%, which is equal to the stock's return provided in the question, therefore, the stock is correctly valued .
Answer:
The stock is correctly valued
Step-by-step explanation:
The formula for SML return can be given as:
SML return = Risk free rate + (beta*market risk premium )
Risk free rate = 3% = 0.03
Beta =0.8
market risk premium =10% = 0.1
SML return = 0.03+(0.8*0.1) = = 0.11 = 0.11 * 100 = 11%
Stock return based on market price = 11%
Since SML return = Stock return based on market price = 11% , the stock is correctly valued