Your opinion is that CSCO has an expected rate of return of 0.15.It has a beta of 1.3.The risk-free rate is 0.04 and the market expected rate of return is 0.115.According to the Capital Asset Pricing Model, this security is
A)underpriced.
B)overpriced.
C)fairly priced.
D)Cannot be determined from data provided.

Question

Quizplus · Accepted Answer

The Capital Asset Pricing Model (CAPM) formula is: Expected Return = Risk-Free Rate + Beta * (Market Return - Risk-Free Rate). Plugging in the values: 0.15 = 0.04 + 1.3 * (0.115 - 0.04), which simplifies to 0.15 ≠ 0.1375. Since the expected return (0.15) is higher than the CAPM return (0.1375), the security is underpriced.

Your Opinion Is That CSCO Has an Expected Rate of Return