Security X has an expected rate of return of 21% and a beta of 1.85. The...
Homework Answers
According to CAPM, Required rate of return = Rf + beta(Rm-Rf)
Rf = 3%, Rm= 12%, beta = 1.85, expected return = 21%
Required rate of return = Rf + beta(Rm-Rf) = 3% + 1.85(12%-3%) = 19.65%
As expected return (21%) > required rate of return (19.65%), stock is undervalued/underpriced.
Answer : c : underpriced
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