The risk-free rate is 3% and the expected rate of return on the market portfolio is 8%. a. Calculate the required rate of return on a security with a beta of 2.16. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) b. If the security is expected to return 13%, is it overpriced or underpriced?
Risk and return
Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary.
Capital Asset Pricing Model
Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.
The risk-free rate is 3% and the expected
a. Calculate the required rate of return on a security with a beta of 2.16. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)
b. If the security is expected to return 13%, is it overpriced or underpriced?
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