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Assume that the CAPM is a good description of stock price returns. The market expected ret

Assume that the CAPM is a good description of stock price returns. The market expected ret

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 news arrives that does not change any of these numbers, but it does change the expected returns of the following stocks:

Stock Expected Return Volatility Beta
Taggart Transcontinental 8% 28% 1.2
Rearden Metal 13% 40% 1.7
Wyatt Oil 7% 20% 0.8
Nielson Motors 10% 32% 1.3

Which of the following stocks represent buying opportunities?

1.   Taggart Transcontinental

2.   Rearden Metal

3.   Wyatt Oil

4.   Nielson Motors

a.) 1 only

b.) 2 & 4 only

c.) 1 & 2 only

d.) 2 & 3 only

Abhinav 02-Dec-2019

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