Question

24. Which one of the following stocks is correctly priced if the risk-free rate of return...

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

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Homework Answers

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.

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