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. …
- 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.
- 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.
- Now, if the stock was correctly priced (analyst estimatecoincides with the CAPM), should the portfolio manager still investinto such stock? Why or Why not?