An asset is priced to earned a 14% annual return; the asset has a beta of 1.4. The market risk premium is 7% and the risk free rate is 6%. The asset is
A) underpriced.
B) correctly priced.
C) overpriced.
D) cannot be determined with the information provided

Question

Quizplus · Accepted Answer

We can use the Capital Asset Pricing Model (CAPM) to determine the expected return of an asset, given its beta in relation to the market. 
Expected Return = Risk-Free Rate + Beta*(Market Risk Premium)
= 6% + 1.4*(7%)
= 16.8%
Since the expected return is higher than the required return of 14%, the asset is overpriced.

An Asset Is Priced to Earned a 14% Annual Return;