Answer:
Required rate of return= 14.8
If the security is expected to return 15%, it is underpriced.
Explanation:
The required rate of return on the security can be calculated using the CAPM formula which states that
Required rate of return =rf + B(rm - rf)
where rf= risk free rate
B= beta of the security
rm = return on the market
Required rate of return = = 14.68%
If the security is expected to return 15%, it is underpriced, and is a good investment. Discounting the expected cash-flows from the security at this higher expected return of 15% is going to yield a lower price compared to what the investor is prepared to pay given his required rate of return of 14.68%.
