Which one of the following shares is correctly priced if the risk-free rate of return is 2.5% and the market risk premium is 8%?
$\begin{array}{l}
\begin{array}{|l|l|l|}
\hline
Share &Beta &\text { Expected Retum }\
\hline \mathrm{A} & .68 & 8.2 \% \
\hline \mathrm{B} & 1.42 & 13.9 \% \
\hline \mathrm{C} & 1.23 & 11.8 \% \
\hline \mathrm{D} & 1.31 & 12.6 \% \
\hline \mathrm{E} & .94 & 9.7 \% \
\hline
\end{array}
\end{array}$
A)A
B)B
C)C
D)D
E)E

Question

Quizplus · Accepted Answer

The expected return for a share can be calculated using the Capital Asset Pricing Model (CAPM): Expected Return = Risk-Free Rate + Beta * Market Risk Premium. For Share B: Expected Return = 2.5% + 1.42 * 8% = 13.86%, which is approximately equal to the given expected return of 13.9%.

Which One of the Following Shares Is Correctly Priced If