Which one of the following stocks is correctly priced according to CAPM if the risk-free rate of return is 3.4 percent and the market risk premium is 7.4 percent? Stock Beta Expected Return A. 87.096 B 1.09.102 C 1.62.146 D. 98.107 E 1.16.139

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Candy

9 October, 17:20

Which one of the following stocks is correctly priced according to CAPM if the risk-free rate of return is 3.4 percent and the market risk premium is 7.4 percent? Stock Beta Expected Return A. 87.096 B 1.09.102 C 1.62.146 D. 98.107 E 1.16.139

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Answers (1)

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Virginia Summers · Answer 1

D) Beta. 98 expected return. 107

Explanation:

In CAPM (Capital Asset Pricing Model), expected return = risk-free rate + Beta * market risk premium = 3.4% + Beta * 7.4%

We try every choice consecutively

A) Beta. 87 expected return. 096

⇒ expected return = 3.4% + 0.87 * 7.4% = 0.098

A is wrong

B) Beta 1.09 expected return. 102

⇒ expected return = 3.4% + 1.09 * 7.4% = 0.1147

B is wrong

C) Beta 1.62 expected return. 146

⇒ expected return = 3.4% + 1.62 * 7.4% = 0.154

C is wrong

D) Beta. 98 expected return. 107

⇒ expected return = 3.4% + 0.98 * 7.4% = 0.107

D is TRUE

E) Beta 1.16 expected return. 139

⇒ expected return = 3.4% + 1.16 * 7.4% = 0.12

E is wrong