Assume that the CAPM is a good description of stock price returns. The market ex
ID: 2703452 • Letter: A
Question
Assume that the CAPM is a good description of stock price returns. The market expected
return is 7% with 10% volatility and the risk-free rate is 3%. New news arrives that does not
change any of these numbers but it does change the expected return of the following stocks:
Expected Return Volatility Beta
Green Leaf 12% 20% 1.5
NatSam 10% 40% 1.8
HanBel 9% 30% 0.75
Rebecca Automobile 6% 35% 1.2
a. At current market prices, which stocks represent buying opportunities?
b. On which stocks should you put a sell order in?
Explanation / Answer
Green leaf represent buying opportunity
b. Nat sam as it gives 10% return with higher risk.