Which one of the following stocks is correctly priced if the risk-free rate of return is 3.2 percent and the market rate of return is 11.76 percent? $$\begin{array} { c c c }
\text { Stock } & \text { Beta } & \text { Expected Return } \
\text { A } & 0.87 & 11.03 \% \
\text { B } & 1.09 & 12.50 \% \
\text { C } & 1.18 & 13.21 \% \
\text { D } & 1.34 & 15.02 \% \
\text { E } & 1.62 & 17.07 \%
\end{array}$$
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 3.2 percent and the market rate of return is 11.76 percent? $$\begin{array} { c c c } 
\text { Stock } & \text { Beta } & \text { Expected Return } \
\text { A } & 0.87 & 11.03 \% \
\text { B } & 1.09 & 12.50 \% \
\text { C } & 1.18 & 13.21 \% \
\text { D } & 1.34 & 15.02 \% \
\text { E } & 1.62 & 17.07 \%
\end{array}$$
A)A
B)B
C)C
D)D
E)E

Quizplus · Accepted Answer

E(r)_A = 0.0354 + [0.87 × (0.1176 - 0.0354)] = 0.1069E(r)_B = 0.0354 + [1.09 × (0.1176 - 0.0354)] = 0.1250 Stock B is correctly priced.E(r)_C = 0.0354 + [1.18 × (0.1176 - 0.0354)] = 0.1324E(r)_D = 0.0354 + [1.34 × (0.1176 - 0.0354)] = 0.1456E(r)_E = 0.0354 + [1.62 × (0.1176 - 0.0354)] = 0.1686

Which One of the Following Stocks Is Correctly Priced If