Your opinion is that CSCO has an expected rate of return of 0.15. It has a beta of 1.3. The risk-free rate is 0.04 and the market expected rate of return is 0.115. According to the Capital Asset Pricing Model, this security is
A) underpriced.
B) overpriced.
C) fairly priced.
D) Cannot be determined from data provided.
E) None of the options are correct.

Question

Quizplus · Accepted Answer

According to the Capital Asset Pricing Model (CAPM), the expected rate of return on a security is calculated as: Risk-Free Rate + Beta * (Market Rate of Return - Risk-Free Rate). Plugging in the given values: 0.04 + 1.3 * (0.115 - 0.04) = 0.1375. Since the expected rate of return of 0.15 is higher than the CAPM calculated return of 0.1375, the security is underpriced.

Your Opinion Is That CSCO Has an Expected Rate of Return