Given the following data for a stock: beta = 1.5; risk-free rate = 4%; market rate of return
= 12%; and Expected rate of return on the stock = 15%. Then the stock is:
A) overpriced
B) under priced
C) correctly priced
D) cannot be determined

Question

Quizplus · Accepted Answer

The stock is overpriced because its expected rate of return (15%) is lower than the required rate of return (15.6%) calculated using the CAPM formula: Expected rate of return = Risk-free rate + Beta * (Market rate of return - Risk-free rate) = 4% + 1.5 * (12% - 4%) = 15.6%.

Given the Following Data for a Stock: Beta = 1