Question

Your opinion is that security C has an expected rate of return of 0.106. It has a beta of 1.1. The risk-free rate is 0.04, and the market expected rate of return is 0.10. According to the Capital Asset Pricing Model, this security is:________.
A. underpriced.
B. overpriced.
C. fairly priced.
D. cannot be determined from data provided.

Answer 1

Answer:

C. fairly priced.

Explanation:

For this question we use the Capital Asset Pricing model formula that is shown below:

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

= 0.04 + 1.1 × (0.10 - 0.04)

= 0.04 + 1.1 × 0.06

= 0.106

As the expected rate of return given in the question is 0.106

And, we calculate it so it would be appear same i.e 0.106

So, the security is fairly priced