Question: The Portfolio Beta Of An Investment Fund Is Currently 0.80. The Risk-free Rate Is 5% And The Expected Market Return Is 14%. A Portfolio Manager Is Forecasting A Return Of 20% On A Stock With Beta 1.5. Based On The CAPM Model (which Gives The Equilibrium Return) And The Analyst’s Estimate Try To Explain If The Stock Is Currently Correctly Priced (e.g. …

Question: The Portfolio Beta Of An Investment Fund Is Currently 0.80. The Risk-free Rate Is 5% And The Expected Market Return Is 14%. A Portfolio Manager Is Forecasting A Return Of 20% On A Stock With Beta 1.5. Based On The CAPM Model (which Gives The Equilibrium Return) And The Analyst’s Estimate Try To Explain If The Stock Is Currently Correctly Priced (e.g. …

  1. The portfolio beta of an investment fund is currently 0.80. Therisk-free rate is 5% and the expected market return is 14%. Aportfolio manager is forecasting a return of 20% on a stock withbeta 1.5.
  1. Based on the CAPM model (which gives the equilibrium return)and the analyst’s estimate try to explain if the stock is currentlycorrectly priced (e.g. not over or under-priced) in themarket.
  2. Now, if the stock was correctly priced (analyst estimatecoincides with the CAPM), should the portfolio manager still investinto such stock? Why or Why not?