The following particulars about four corporate securities (shares) are available: Security Today's Price (₹) Predicted Price after one year (₹) Expected Dividend during coming year (₹) Beta estimates β A 490 580 7.0 1.4

(i) Estimation of Return based on CAPM CAPM Equation : $R_s = R_f + \beta (R_m - R_f)$ Where $R_s$ stands for estimated return on the security $R_f$ stands for Risk free return = 8% $R_m$ stands for return from the market = 14% $\beta$ stands for Beta The estimated returns are: Security A: $R_A = 8 + 1.4(14 - 8) = 8 + 1.4(6) = 8 + 8.4 = \textbf{16.4\%}$ Security B: $R_B = 8 + 1.2(14 - 8) = 8 + 1.2(6) = 8 + 7.2 = \textbf{15.2\%}$ Security C: $R_C = 8 + 1.0(14 - 8) = 8 + 1.0(6) = 8 + 6 = \textbf{14\%}$ Security D: $R_D = 8 + 0.5(14 - 8) = 8 + 0.5(6) = 8 + 3 = \textbf{11\%}$ (ii) Calculation of Predicted Return: Predicted Return ($P_{ri}$) = $[(\text{Predicted Price} - \text{Current Price}) + \text{Expected Dividend}] / \text{Current Price} \times 100$ Security A: $P_{rA} = [(580 - 490) + 7] / 490 \times 100 = (90 + 7) / 490 \times 100 = 97 / 490 \times 100 = \textbf{19.8\%}$ Security B: $P_{rB} = [(200 - 180) + 7] / 180 \times 100 = (20 + 7) / 180 \times 100 = 27 / 180 \times 100 = \textbf{15\%}$ Security C: $P_{rC} = [(640 - 570) + 5] / 570 \times 100 = (70 + 5) / 570 \times 100 = 75 / 570 \times 100 = \textbf{13.16\%}$ Security D: $P_{rD} = [(245 - 220) + 6] / 220 \times 100 = (25 + 6) / 220 \times 100 = 31 / 220 \times 100 = \textbf{14.09\%}$ Securities whether under-valued or over-valued Security Predicted Return CAPM Return Under valued /over valued A 19.8% 16.4% Under valued (19.8% > 16.4%) B 15% 15.2% Over valued (15% < 15.2%) C 13.16% 14% Over valued (13.16% < 14%) D 14.09% 11% Under valued (14.09% > 11%)