Ask Question
13 August, 16:14

CAPM and Expected Return. If the risk-free rate is 6% and the expected rate of return on the market portfolio is 13%, is a security with a beta of 1.25 and an expected rate of return of 16% overpriced or underpriced

+4
Answers (1)
  1. 13 August, 19:06
    0
    under priced

    Explanation:

    In this question, we apply the Capital Asset Pricing Model (CAPM) formula which is shown below

    Required rate of return = Risk-free rate of return + Beta * (Market rate of return - Risk-free rate of return)

    = 6% + 1.25 * (13% - 6%)

    = 6% + 1.25 * 7%

    = 6% + 8.75%

    = 14.75%

    The Market rate of return - Risk-free rate of return) is also known as the market risk premium and the same is applied.

    As we see that the expected return i. e 16% is more than the required rate of return so the return is under priced
Know the Answer?
Not Sure About the Answer?
Get an answer to your question ✅ “CAPM and Expected Return. If the risk-free rate is 6% and the expected rate of return on the market portfolio is 13%, is a security with a ...” in 📙 Business if there is no answer or all answers are wrong, use a search bar and try to find the answer among similar questions.
Search for Other Answers