Which one of the following stocks is correctly priced if the risk-free rate of return is 3.6% and the market rate of return is 10.5%? $$\begin{array} { c r c }
\underline{\text { Stock }} & \underline{ \text { Beta }} & \underline{\text { Expected Return }} \
\text { A } & .85 & 9.2 \% \
\text { B } & 1.08 & 11.8 \% \
\text { C } & 1.69 & 15.3 \% \
\text { D } & .71 & 7.8 \% \
\text { E } & 1.45 & 12.3 \%
\end{array}$$
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 3.6% and the market rate of return is 10.5%? $$\begin{array} { c r c } 
 \underline{\text { Stock }} & \underline{ \text { Beta }} &  \underline{\text { Expected Return }} \
\text { A } & .85 & 9.2 \% \
\text { B } & 1.08 & 11.8 \% \
\text { C } & 1.69 & 15.3 \% \
\text { D } & .71 & 7.8 \% \
\text { E } & 1.45 & 12.3 \%
\end{array}$$
A)A
B)B
C)C
D)D
E)E

Quizplus · Accepted Answer

The expected return for a stock can be calculated using the following formula:

Expected return = Risk-free rate + Beta × (Market rate of return - Risk-free rate)

Using the given risk-free rate and market rate of return, we can calculate the expected returns for each stock as follows:

A: 3.6% + 0.85 × (10.5% - 3.6%) = 8.6%
B: 3.6% + 1.08 × (10.5% - 3.6%) = 11.8%
C: 3.6% + 1.69 × (10.5% - 3.6%) = 15.3%
D: 3.6% + 0.71 × (10.5% - 3.6%) = 7.8%
E: 3.6% + 1.45 × (10.5% - 3.6%) = 12.3%

Therefore, the only stock that is correctly priced according to the CAPM is stock C, since its expected return matches the values calculated using the CAPM formula.

Which One of the Following Stocks Is Correctly Priced If