The risk-free rate is 7% and the expected rate of return on the market portfolio is 12%. a. Calculate the required rate of return on a security with a beta of 1.96. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) Required return % b. If the security is expected to return 15%, is it overpriced or underpriced? O Overpriced O Underpriced
The risk-free rate is 7% and the expected rate of return on the market portfolio is 12%. a. Calculate the required rate of return on a security with a beta of 1.96. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) Required return % b. If the security is expected to return 15%, is it overpriced or underpriced? O Overpriced O Underpriced
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:The risk-free rate is 7% and the expected rate of return on the market portfolio is 12%.
a. Calculate the required rate of return on a security with a beta of 1.96. (Do not round intermediate calculations. Enter your answer
as a percent rounded to 2 decimal places.)
Required return
%
b. If the security is expected to return 15%, is it overpriced or underpriced?
O Overpriced
O Underpriced
Expert Solution
Step 1
Possible return from the investment and risk involved in it, both are related to each. There are various models which study the relation between both. CAPM is one of them.
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