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 th

Question

3 years ago

6

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 th

e market expected rate of return is 0.10. According to the Capital Asset Pricing Model, this security isA. underpriced. B. overpriced.C. fairly priced.D. Cannot be determined from data provided.

Business

1 answer:

Lostsunrise [7] · Answer 1 · 2022-07-19T10:08:05+03:00

Answer:

C. Fairly priced

Explanation: use the equation of calculating Capital Asset Pricing Model CAPM

ER=Rf+βi(ERm−Rf)

where:

ER =expected return of investment = ?

Rf=risk-free rate = 4%

βi=beta of the investment = 1.1

(ERm−Rf)=market risk premium = (10% - 4%)

Therefore ER=Rf+βi(ERm−Rf)

= 4% + 1.1(10% - 4%)

=10.6%

therefore, the security is fairly priced