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Assume the market rate of return is 10.1 percent and the risk-free rate of return is 3.2 percent. Lexant stock has 2 percent less systematic risk than the market and has an actual return of 10.2 percent. This stock:

Respuesta :

Answer:

undervalued

Explanation:

In order to find whether it is undervalued or overvalued or something else we need to calculate it as follows

DATA

The systematic risk of the market (beta) = 1.

beta of Lexant ( 1 - 2%) =  0.98

Risk free rate = 3.2%

Solution  

Expected return = risk free rate + (beta)x(market return - risk free rate)

Expected return = 3.2% + (0.98)*(10.1% - 3.2%)

Expected return = 9.96%

Actual return = 10.2%.

Therefore it is undervalued by 0.24% as the actual return is higher than the expected return

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