UGBA 103 _4.2 Answers - as its price is too low [leading to...

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UGBA 103 Assignment #4 Answers Problem 6-13 year stock X stock Y Market deviation X deviation Y deviation M M squared 1997 14 13 12 6.00 7.60 6.8 46.24 1998 19 7 10 11.00 1.60 4.8 23.04 1999 -16 -5 -12 -24.00 -10.40 -17.2 295.84 2000 3 1 1 -5.00 -4.40 -4.2 17.64 2001 20 11 15 12.00 5.60 9.8 96.04 mean 8.00 5.40 5.20 variance 119.7 covariance with market 161.25 77.90 beta 1.347 0.651 required ROR 12.74% 9.25% portfolio beta 1.21 weighted average of X beta and Y beta portfolio ROR 12.04% (d) If stock X has an E(ROR) = 22%, it is undervalued,
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Unformatted text preview: as its price is too low [leading to a high E(ROR)]. The price needs to increase to lower the E(ROR) to 12.74%. Note: Parts (a)-(c) are based on an implicit assumption that the investor is using the historical estimates to invest today. A (sensible) investor would not use the historical estimates in analyzing a forward-looking ivestment...
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This note was uploaded on 07/17/2010 for the course UGBA 18195 taught by Professor Johngonzales during the Summer '10 term at University of California, Berkeley.

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