Answered

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Stock A has a beta of .68 and an expected return of 8.1 percent. Stock B has a beta of 1.42 and an expected return of 13.9 percent. Stock C has beta of 1.23 and an expected return of 12.4 percent. Stock D has a beta of 1.31 and an expected return of 12.6 percent. Stock E has a beta of .94 and an expected return of 9.8 percent. Which one of these stocks is the most accurately priced if the risk-free rate of return is 2.5 percent and the market risk premium is 8 percent

Sagot :

Answer:

Stock B is correctly priced

Explanation:

The expected return is shown below:

For stock A

= 2.5 + 0.68 × 8

= 7.94

For stock B

= 2.5 + 1.42 × 8

= 13.86

For stock C

= 2.5 + 1.23 × 8

= 12.34

For stock D

= 2.5 + 1.31 × 8

= 12.98

For stock E

= 2.5 + 0.94 × 8

= 10.02

So stock B is correctly priced

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