Use the following information to answer the question(s) below.

Assume that the CAPM is a good description of stock price returns. The market expected return is 8% with 12% volatility and the risk-free rate is 3%. New information arrives that does not change any of these numbers, but it does change the expected returns of the following stocks:

-Which of the following stocks represent buying opportunities?
1.Taggart Transcontinental
2.Rearden Metal
3.Wyatt Oil
4.Nielson Motors

Question

Use the following information to answer the question(s) below.

Assume that the CAPM is a good description of stock price returns. The market expected return is 8% with 12% volatility and the risk-free rate is 3%. New information arrives that does not change any of these numbers, but it does change the expected returns of the following stocks:

-Which of the following stocks represent buying opportunities? 
1.Taggart Transcontinental
2.Rearden Metal
3.Wyatt Oil
4.Nielson Motors

Quizplus · Accepted Answer

According to the CAPM, a stock is undervalued if its expected return is higher than its required return. Since the risk-free rate and market volatility have not changed, the required return is still 8%. Rearden Metal and Nielson Motors have expected returns of 10% and 11%, respectively, which are higher than the required return and thus represent buying opportunities. Taggart Transcontinental and Wyatt Oil have expected returns of 7% and 8%, respectively, which are lower than the required return and thus are not buying opportunities. Therefore, the correct choice is 2 and 4 only.

Use the Following Information to Answer the Question(s) Below