Within the context of the capital asset pricing model (CAPM), assume:∙ Expected return on the market = 15%∙ Risk-free rate = 8%∙ Expected rate of return on XYZ security = 17%∙ Beta of XYZ security = 1.25Which one of the following is correct?a. XYZ is overpriced.b. XYZ is fairly priced.c. XYZ’s alpha is −.25%.d. XYZ’s alpha is .25%.
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.
Within the context of the
∙ Expected return on the market = 15%
∙ Risk-free rate = 8%
∙ Expected
∙ Beta of XYZ security = 1.25
Which one of the following is correct?
a. XYZ is overpriced.
b. XYZ is fairly priced.
c. XYZ’s alpha is −.25%.
d. XYZ’s alpha is .25%.
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