单选题 Level I CFA candidate Adeline Bass is a member of an investment club. At the next meeting, she is to recommend whether or not the club should purchase the stocks of CS Industries and MG Consolidated. The risk-free rate is at 6 percent and the expected return on the market is 15 percent. Prior to the meeting, Bass gathers the following information on the two stocks:

CS Industries
MG Consolidated
Current Market Value
$25
$50
Expected Market Value in One Year
$30
$55
Expected Dividend
$1
$1
Beta
1.2
0.80
Bass should recommend that the club:
  • A. purchase MG only.
  • B. purchase both stocks.
  • C. purchase CS only.
【正确答案】 C
【答案解析】the holding period ( or expected) return is calculated as : ( ending price - beginning price + any cash flows/dividends)/beginning price. The required return uses the equation of the SML: risk free rate + Beta × ( expected market rate - risk - free rate). For CS Industries: ER=(30-25+1)/25=24%, RR=6+1.2×(15-6)=16.8%. Stock is underpriced - purchase. For MG Consolidated: ER=(55-50+1)/50=12%, RR=6+0.80×(15-6)=13.2%. Stock is overpriced -do not purchase.