Intrinsic Value and Return Concepts (2).
As an active investor, you have developed forecasts of returns for three securities and translated those forecasts into expected rate of return estimates. You have also estimated the securities’ required rates of return using two models that we will discuss in the capital asset pricing model (CAPM) and the Fama French (FF) three factor model. As a next step, you intend to rank the securities by alpha.
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TABLE 1 2 Rates of Return |
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Expected Rate of Return |
CAPM Required Rate of Return |
FF Required Rate of Return |
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Security 1 |
0.15 |
0.10 |
0.12 |
|
Security 2 |
0.07 |
0.12 |
0.07 |
|
Security 3 |
0.09 |
0.10 |
0.10 |
Based on the information in Table 1 2:
1. Calculate the exante alphas of each security.
2. Rank the securities by relative attractiveness using the CAPM, and state whether each security is overvalued, fairly valued, or undervalued.