The risk-free rate is 5% and the expected rate of return on the market portfolio is 12%

Finance Aug 19, 2020

The risk-free rate is 5% 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 1.64. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

b. If the security is expected to return 15%, is it overpriced or underpriced?

Expert Solution

a). Computation of the required return:-

Required return = Risk free rate + Beta * (Expected market return - Risk free rate)

= 5% + 1.64 * (12% - 5%)

= 5% + (1.64 * 7%)

= 5% + 11.48%

= 16.48%

b). The required return is greater than the expected rate of return (15%) so the security is overpriced.

Archived Solution

Unlocked Solution

You have full access to this solution. To save a copy with all formatting and attachments, use the button below.

Already a member? Sign In

Important Note: This solution is from our archive and has been purchased by others. Submitting it as-is may trigger plagiarism detection. Use it for reference only.

For ready-to-submit work, please order a fresh solution below.

Or get 100% fresh solution

Get Custom Quote