4. Which one of the following stocks is correctly priced if the risk-free rate of return...
4. Which one of the following stocks is correctly priced if the risk-free rate of return is 3.7 percent and the market risk premium is 8.2 percent? Stock Beta Expected Return A 0.73 7.84% B 1.53 17.50% C 1.34 11.28% D 1.29 11.87% E 0.95 11.49% a. Stock D b. Stock B c. Stock C . d. Stock E e. Stock A
Homework Answers
| Calculations | Particulars | A | B | C | D | E |
| A | Risk Free rate | 3.7 | 3.7 | 3.7 | 3.7 | 3.7 |
| B | Market risk premium | 8.2 | 8.2 | 8.2 | 8.2 | 8.2 |
| C | Beta | 0.73 | 1.53 | 1.34 | 1.29 | 0.95 |
| D = A+B x C | Return as per CAPM | 9.686 | 16.246 | 14.688 | 14.278 | 11.49 |
| E | Return as given | 7.84 | 17.5 | 11.28 | 11.87 | 11.49 |
| F = D - E | Difference | 1.846 | -1.254 | 3.408 | 2.408 | 0 |
As we can find from the above calculations, stock E is correctly priced and so option d is the correct option
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