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9 November, 02:00

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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  1. 9 November, 05:23
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    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
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