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The return on the Tarheel Corporation stock is expected to be 14 percent with a standard deviation of 10 percent. The beta of Tarheel is 0.7. The risk-free rate is 9 percent, and the expected return on the market portfolio is 16 percent. What is the probability that an investor in Tarheel will earn a rate of return less than the required rate of return? Assume that returns are normally distributed. Use Table V to answer the question.

Round z value in intermediate calculation to two decimal places.

Round your answer to the nearest whole number.

TABLE V Normal Distribution (Area of the Normal Distribution That is to the Right of +z or the Left of -z Standard Deviations

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Answer #1

Hello

Using CAPM, we will calculate the required rate of return

Ke = 9% + 0.7(16% - 9%) = 13.9%

Hence,

\\ P(X \leq 13.9)=P(z\leq \frac{X-\mu}{\sigma})=P(z\leq\frac{13.9-14}{10}) \\ \\ P(X \leq 13.9)=P(z\leq-0.01)=0.496=49.6\%

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