Your opinion is that CSCO has an expected rate of return of 0.13.It has a beta of 1.3.The risk-free rate is 0.04 and the market expected rate of return is 0.115.According to the Capital Asset Pricing Model,this security is
A)underpriced.
B)overpriced.
C)fairly priced.
D)cannot be determined from data provided.
E)none of the above.

Question

Quizplus · Accepted Answer

According to the Capital Asset Pricing Model, the expected return of a security should be equal to the risk-free rate plus the product of the security's beta and the difference between the expected market return and the risk-free rate. Using the given values, the expected return of CSCO would be:

0.04 + (1.3 * (0.115 - 0.04)) = 0.152

Since the expected return based on the CAPM is higher than the expected return given in the question (0.13), this implies that the security is overpriced. Therefore, the correct answer is B: overpriced.

Your Opinion Is That CSCO Has an Expected Rate of Return