Capital asset pricing model (CAPM) is widely used throughout finance for pricing risky securities and generating expected returns for assets given the risk of those assets and cost of capital. It is simple and allows for easy comparisons of investment alternatives. However, it is not without its shortcomings.Required: Critically discuss the shortcomings of CAPM Adeline approaches you for advice on the following portfolio that she is holding. She expects a risk-free return (RFR) of 4% and market return (RM) of 8%. Stock Beta b Current Price (RM) Expected Price (RM) Expected Dividend (RM) A 0.85 26 27 0.50 B 1.25 32 34 1.50 C -0.20 37 38 Nil Required: Calculate the required returns for stocks A, B, and C respectively.2. Calculate the expected returns for stocks A, B, and C respectively.3. Comment on whether stocks A, B and C are overvalued or undervalued. Then advise Adeline on the appropriate actions to be undertaken accordingly.

Capital asset pricing model (CAPM) is widely used throughout finance for pricing risky securities and generating expected returns for assets given the risk of those assets and cost of capital. It is...

Capital asset pricing model (CAPM) is widely used throughout finance for pricing risky securities and generating expected returns for assets given the risk of those assets and cost of capital. It is simple and allows for easy comparisons of investment alternatives. However, it is not without its shortcomings.

Required: Critically discuss the shortcomings of CAPM

Adeline approaches you for advice on the following portfolio that she is holding. She expects a risk-free return (RFR) of 4% and market return (R_M) of 8%.

Required:

2. Calculate the expected returns for stocks A, B, and C respectively.

3. Comment on whether stocks A, B and C are overvalued or undervalued. Then advise Adeline on the appropriate actions to be undertaken accordingly.

Jun 09, 2022