Question

24. Which one of the following stocks is correctly priced if the risk-free rate of return is 2.4 percent and the market risk premium is 7.70 percent?

Stock	Beta	Expected Return
A	0.74	8.60%
B	1.49	13.90%
C	1.39	13.10%
D	1.06	10.57%
E	0.98	9.90%

Stock A

Stock B

Stock C

Stock D

Stock E

Answer 1

Correct option is > Stock C

Company	Risk free rate	MRP	Beta	CAPM Working	Expected return	Actual Return
Stocks	Rf	MRP	B	Ri = Rf+B*MRP	Ri = Rf+B*MRP	Given
Stock A	2.40%	7.70%	0.74	=2.4%+0.74*7.7%	8.10%	8.60%
Stock B	2.40%	7.70%	1.49	=2.4%+1.49*7.7%	13.87%	13.90%
Stock C	2.40%	7.70%	1.39	=2.4%+1.39*7.7%	13.10%	13.10%
Stock D	2.40%	7.70%	1.06	=2.4%+1.06*7.7%	10.56%	10.57%
Stock E	2.40%	7.70%	0.98	=2.4%+0.98*7.7%	9.95%	9.90%

Stock C is accurately priced.