Assume the risk-free rate of return is 6.5 percent and the market rate of return is 11.2 percent.Stock A with a beta of 0.88 and an expected return of 9.79 percent;Stock B with a beta of 1.26 and an expected return of 11.36 percent;Stock C with a beta of 1.47 and an expected return of 12.28 percent;Stock D with a beta of 0.79 and an expected return of 10.61 percent.Which one of the following stocks,if any,is correctly priced according to CAPM?
A)Stock A
B)Stock B
C)Stock C
D)Stock D
E)None of the stocks are correctly priced according to CAPM.

Question

Quizplus · Accepted Answer

E(r)_A = 0.065 + 0.88(0.112 − 0.065)= 0.1064,or 10.64 percent E(r)_B = 0.065 + 1.26(0.112 − 0.065)= 0.1242,or 12.42 percent E(r)_C = 0.065 + 1.47(0.112 − 0.065)= 0.1341,or 13.41 percent E(r)_D = 0.065 + 0.79(0.112 − 0.065)= 0.1021,or 10.21 percent None of the stocks are correctly priced.

Assume the Risk-Free Rate of Return Is 6