Question

stock a has a beta of .69 and an expected return rate of 9.27%. stock b had 1.13 beta and an expected return of 11.88%. stock c has 1.48 betaand an expected return of 15.31%. stock d has beta of .71 and expected return of 8.71%. lastly, stock e has 1.45 beta and an expected return on 15.04%. wich if these stocks is correctly priced if the risk free rate of return is 3.6% and the market rate of return is 10.08%?

A. stock a

B. stock b

C. stock c

D. stock d

E. stock e

Answer 1

Stock	Beta	Expected Return	Rf	Rm	CAPM Return = Rf+Beta*(Rm-Rf)	Difference b/w CAPM return & Exp Return
A	0.69	9.27%	3.60%	10.08%	8.07%	1.20%
B	1.13	11.88%	3.60%	10.08%	10.92%	0.96%
C	1.48	15.31%	3.60%	10.08%	13.19%	2.12%
D	0.71	8.71%	3.60%	10.08%	8.20%	0.51%
E	1.45	15.04%	3.60%	10.08%	13.00%	2.04%
Since the stock D has minimum gap between expected return and CAPM return, so Stock D is correctly priced