Assignment # 1

MC190403140

Solution # 1

For Stock A
RRR = rF + B(rM-rf)
RRR = 10% + 0.5(12% - 10%)
RRR = 10% + 0.5(2%)
RRR = 10% + 0.5(0.02)
RRR = 10% + 0.01
RRR = 10% + 1%
RRR = 11%
For Stock B
RRR = rF + B(rM-rf)
RRR = 10% + 1.5(13% - 10%)
RRR = 10% + 1.5(3%)
RRR = 10% + 1.5(0.03)
RRR = 10% + 0.045
RRR = 10% + 4.5%
RRR = 14.5%
For Stock C
RRR = rF + B(rM-rf)
RRR = 10% + 1(12.5% - 10%)
RRR = 10% + 1(2.5%)
RRR = 10% + 1(0.025)
RRR = 10% + 0.025
RRR = 10% + 2.5%
RRR = 12.5%
Solution # 2
Fair Price of Stock A
Po* = DIV1/[rRF +(rM – rRF)A – g]
Po* = 5/[10% + (12% - 10%)0.5 – 4%]
Po* = 5/[0.1 + (2%)0.5 – 0.04]
Po* = 5/[0.1 + 0.01 – 0.04]
Po* = 5/[0.07]
Po* = 71.42 Rs
Fair Price of Stock B
Po* = DIV1/[rRF +(rM – rRF)A – g]
Po* = 3/[10% + (13% - 10%)1.5 – 6%]
Po* = 3/[0.1 + (3%)1.5 – 0.06]
Po* = 3/[0.1 + 0.045 – 0.06]
Po* = 3/[0.085]
Po* = 35.29 Rs
Fair Price of Stock C
Po* = DIV1/[rRF +(rM – rRF)A – g]
Po* = 6/[10% + (12.5% - 10%)1 – 2%]
Po* = 6/[0.1 + (2.5%)1 – 0.02]
Po* = 6/[0.1 + 0.025 – 0.02]
Po* = 6/[0.105]
Po* = 57.14 Rs

Solution # 3
If value of Stock A is exactly intrinsic than said to be faired value but value of stock trades away
said to be (Undervalued or Overvalued)
Stock A is undervalued as the fair price is more than the market price.
Stock B is overvalued as the fair price is less the market price.
Stock C is undervalued as the fair price is more than the market price.
Solution # 4
Stock A and Stock C should be used to construct the portfolio because of two reasons as the rate
of Stock A and Stock C is less than Stock B. The required rate of return of Stock A is less than its market
rate of return and required rate of return of Stock C is equal to its market rate of return while the required
rate of return of Stock B is more than its market rate of return.