Security X has an expected rate of return of 13% and a beta of 1.15.The risk-free rate is 5% and the market expected rate of return is 15%.According to the capital asset pricing model,security X is _________.
A) fairly priced
B) overpriced
C) underpriced
D) None of the above

Question

Quizplus · Accepted Answer

According to the CAPM, the expected return should be: 5% + 1.15*(15% - 5%) = 16.5%. Since Security X's expected return is 13%, which is less than 16.5%, it is considered overpriced.

Security X Has an Expected Rate of Return of 13