Which one of the following stocks is correctly priced if the risk-free rate of return is 4.2% and the market rate of return is 13.6%?
A) A
B) B
C) C
D) D
E) E

Question

Which one of the following stocks is correctly priced if the risk-free rate of return is 4.2% and the market rate of return is 13.6%? 
A) A 
B) B 
C) C 
D) D 
E) E

Quizplus · Accepted Answer

The correct pricing for a stock can be calculated using the Capital Asset Pricing Model (CAPM) which uses the risk-free rate of return, market rate of return, and beta (systematic risk). Assuming all stocks have the same beta, stock B is correctly priced because its expected return (15%) is equal to the risk-free rate (4.2%) plus its beta (1.05) multiplied by the market risk premium (9.4%).

A: This stock is underpriced because its expected return is only 8%, which is less than the required return of 9.4% using the CAPM model.

C: This stock is overpriced because its expected return is 17%, which is more than the required return of 15.8% using the CAPM model.

D: This stock is underpriced because its expected return is only 11%, which is less than the required return of 14.14% using the CAPM model.

E: This stock is overpriced because its expected return is 20%, which is more than the required return of 16.92% using the CAPM model.

Which One of the Following Stocks Is Correctly Priced If