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BBMF 3083 Stock Valuation Analysis

This document discusses calculating beta coefficients for stocks and determining if they are overvalued or undervalued based on expected returns. It provides calculations for average monthly rate of return, standard deviation, covariance, and correlation coefficient between stock returns. It then analyzes two funds, determining that Fund T is overvalued since its estimated return is lower than what is required based on CAPM, while Fund U is undervalued since its estimated return is higher than what is required by CAPM.

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56 views24 pages

BBMF 3083 Stock Valuation Analysis

This document discusses calculating beta coefficients for stocks and determining if they are overvalued or undervalued based on expected returns. It provides calculations for average monthly rate of return, standard deviation, covariance, and correlation coefficient between stock returns. It then analyzes two funds, determining that Fund T is overvalued since its estimated return is lower than what is required based on CAPM, while Fund U is undervalued since its estimated return is higher than what is required by CAPM.

Uploaded by

SooXueJia
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPTX, PDF, TXT or read online on Scribd

BBMF 3083 Portfolio

Management
Chapter 5: EXTRA Calculation Questions
a) Compute the beta coefficient for each stock.
a) Compute the beta coefficient for each stock.
A, C all have estimated return (given in part c)
exceeding their expected returns (computed in
part b); they are undervalued and are potential
“buy” candidates. B and D is overvalued, as its
estimated return is less than the return required
by the SML it is a potential candidate for selling.
a) Average monthly rate of return for each stock
b) Standard deviation of returns for each stock
c) Covariance between the rates of return

d) The correlation coefficient between the rates of return


3. Over vs. Undervalue
Fund T is overvalued (a potential “sell” candidate) because it should provide a 11.22%
return according to the CAPM, whereas the analyst has estimated only a 9.0% return.
Fund U is undervalued (a potential “buy” candidate) because it should provide an 8.8%
return according to the CAPM, whereas the analyst has estimated a 10% return.

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