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Security X has a rate of return of 13% and a beta of 1.15. The risk-free rate is 5% and the market expected rate of return is

Security X has a rate of return of 13% and a beta of 1.15. The risk-free rate is 5% and the market expected rate of return is
Security X has a rate of return of 13% and a beta of 1.15. The risk-free rate is 5% and the market expected rate of return is
Security X has a rate of return of 13% and a beta of 1.15. The risk-free rate is 5% and the market expected rate of return is
Security X has a rate of return of 13% and a beta of 1.15. The risk-free rate is 5% and the market expected rate of return is
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Answer #1

Rate of return as per CAPM = Risk free rate + beta*(Market return – risk free rate)

= 5% + 1.15*(10%-5%)

= 10.75%

Fair return as per CAPM = 10.75% but actual return is 13%

Hence, Security X is 2)UNDERPRICED as per CAPM

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