note : show all calculation briefly with writing the formula ...
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note : show all calculation briefly with writing the formula
3. The following information describes betas for stock X, Y and the market index, which are estimated from the last year. Return Current price Beta Stock X 10 1.30 Stock Y 15 0.70 Market Index 10.0% 1.00 Risk-free rate 5.0% a. Use the CAPM to determine the future prices for stock X and Y in the next year and assume no dividends payouts b. It is expected that there are 2 dividends for both X and Y before the end of the next year. What are the future prices (i.e. one-year from now) for X and Y. c. Financial analysts now forecast X and Y future prices (i.e one-year from now) at 12 and 16 respectively (no dividend payout during the year). If you firmly believe their forecasting, which stock is currently undervalued or overvalued (Hint: you can calculate whether estimated returns are below or above the SML)? What action should you take towards two stocks? d. Can you discuss why the financial analysts' forecasting prices (12 and 16) will be different from your own calculations in (a)
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