07Feb 2022 by
Answer the following using the Case Study
1.What number should he use for the “risk-free rate”?
2. Should he use any of the estimates for the expected market return (Yahoo’s, MSN’s, or Google’s), or should he take the average of those estimates as his best estimate for expected market return?
3. Should he use any of the beta estimates (Yahoo’s, Google’s, or NASDAQ’s), or should he take the average of those estimates as his best estimate for “Green World” shares’ beta?
4. He wants to draw the Security Market Line (i.e. SML). How can he do that? How will the SML look like?
5. If a stock’s expected return falls exactly on the SML, according to CAPM, is the stock fairly priced, overpriced, or underpriced?
6. If a stock’s expected return is more than what the SML indicates (i.e. above the SML), is the stock fairly priced, overpriced, or underpriced?
7. Think about the SML in question #4. If the expected return on “Green World” shares is 13% and beta of “Green World” is 0.9, is “Green World” stock fairly priced, overpriced, or underpriced according to CAPM? In this case, should Michael invest in “Green World” shares?
8. There is another company that deals with sustainability projects. This company’s name is “Global Unity”. If “Green World” and “Global Unity” stocks both have the same reward to risk ratio (i.e. they are on the same SML) and if the beta of “Global Unity” is 1.3, what is the expected return on “Global Unity” stock? Please use the expected return and beta of “Green World” stock that are given in question #7.
9. In general, if the SML gets steeper (the reward to risk ratio gets higher), is it good for the firms who wants to get financing?
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