To analyze Gritz Blitz, we can calculate the expected return using the Capital Asset Pricing Model (CAPM) and compare it to the predicted return based on the stock's expected price increase.
Step 1: Calculate the Expected Return using CAPM
The CAPM formula is given by:
\[ \text{Expected Return} (R) = R_f + \beta \times (R_m - R_f) \]
Where:
- \(R_f\) = Risk-free rate = 3.00% or 0.03
- \(\beta\) = Beta of the stock = 1.19
- \(R_m - R_f\) = Market portfolio risk premium = 5.00% or 0.05
Substituting the values into the formula:
\[ R = 0.03 + 1.19 \times 0.05 \] \[ R = 0.03 + 0.0595 \] \[ R = 0.0895 \text{ or } 8.95% \]
Step 2: Calculate the Expected Return from Price Change
Now, we will calculate the expected return based on the predicted price movement. The expected price next year is $10.48, and the current price is $10.00.
The expected return from price change can be calculated as:
\[ \text{Expected Price Return} = \frac{\text{Predicted Price} - \text{Current Price}}{\text{Current Price}} \]
Substituting the values:
\[ \text{Expected Price Return} = \frac{10.48 - 10.00}{10.00} = \frac{0.48}{10.00} = 0.048 \text{ or } 4.80% \]
Summary of Returns
- CAPM Expected Return: 8.95%
- Expected Return from Price Change: 4.80%
Conclusion
The expected return from CAPM (8.95%) is higher than the expected return from the price change (4.80%). This may suggest that Gritz Blitz is underpriced based on its risk according to CAPM, as the market may not be pricing in the full risk/return potential of the stock relative to its beta.
Investors might consider this discrepancy when making investment decisions or further analysis of Gritz Blitz.
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