The risk free rate is 3%. The expected rate of return on the market is 10%. Betas and the expected rates of return for four stocks are as follows.: BWI 0.9 , 10%; ORH 1.0, 10%; ORL 1.4 , 12.6%, and DEL 1.5, 18%. Based on a comparison of each stock's expected return versus its required return, which of these stocks should not be purchased?
A) BWI
B) ORH
C) ORL
D) DEL

Question

Quizplus · Accepted Answer

The required return using CAPM is calculated as: Risk-free rate + Beta * (Market return - Risk-free rate). For ORL, the required return is 3% + 1.4 * (10% - 3%) = 12.8%. Since ORL's expected return is 12.6%, which is less than the required return, it should not be purchased.

The Risk Free Rate Is 3