Assume the following data for a stock: Beta = 0.5; risk-free rate = 4 percent; market rate of return = 12 percent; and expected rate of return on the stock = 10 percent. Then the stock is
A)overpriced.
B)underpriced.
C)correctly priced.
D)The answer cannot be determined.

Question

Quizplus · Accepted Answer

According to the Capital Asset Pricing Model(CAPM), the expected rate of return on a stock is calculated as follows:
Expected rate of return on the stock = Risk-free rate + Beta * (Market rate of return - Risk-free rate)
Substituting the given values, we get:
10% = 4% + 0.5 * (12% - 4%)
10% = 4% + 0.5 * 8%
10% = 8%
As the expected rate of return on the stock is less than the computed expected rate of return using the CAPM, the stock is undervalued/underpriced.

Assume the Following Data for a Stock: Beta = 0