What is the alpha of each of the two stocks? You are evaluating two stocks and trying to decide if they are undervalued or overvalued.You are given the following table of information:Price (P)Dividend (d)Dividend growth rate (g)Beta (3)Stock 1 Stock 2$15$30$1$22%3%10.5Assume that the dividend growth rate given is constant and dividends will grow at that rateforever and you can assume the dividend d is the dividend that will be paid next period (e.g.,next year) and the dividend for this year was already paid. Also assume that the CAPMgives you an appropriate discount rate for both stocks (i.e., the CAPM gives the appropriatediscount rate for each stock given its risk). The market risk premium is E[rm] -rf = 6.5%and the risk free rate is rf = 4.5%.

Alpha of stock shows that how is the performance of stock based on the risk involved in the stock so…

You are evaluating two stocks and trying to decide if they are underv You are given the following table of information: Price (P) Dividend (d) Dividend growth rate (g) Stock 1 Stock 2 $15 $30 $1 $2 2% 3%

You are evaluating two stocks and trying to decide if they are underv You are given the following table of information: Price (P) Dividend (d) Dividend growth rate (g) Stock 1 Stock 2 $15 $30 $1 $2 2% 3%

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Question

What is the alpha of each of the two stocks?

You are evaluating two stocks and trying to decide if they are undervalued or overvalued.
You are given the following table of information:
Price (P)
Dividend (d)
Dividend growth rate (g)
Beta (3)
Stock 1 Stock 2
$15
$30
$1
$2
2%
3%
1
0.5
Assume that the dividend growth rate given is constant and dividends will grow at that rate
forever and you can assume the dividend d is the dividend that will be paid next period (e.g.,
next year) and the dividend for this year was already paid. Also assume that the CAPM
gives you an appropriate discount rate for both stocks (i.e., the CAPM gives the appropriate
discount rate for each stock given its risk). The market risk premium is E[rm] -rf = 6.5%
and the risk free rate is rf = 4.5%.

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