An asset is priced to earned an 18% annual return; the asset has a beta of 1.1.premium is 8% and the risk free rate is 6%. The asset is
A) correctly priced.
B) underpriced.
C) overpriced.
D) cannot be determined with the information provided

Question

Quizplus · Accepted Answer

The expected return using the CAPM model is calculated as: Risk-free rate + Beta * Market risk premium = 6% + 1.1 * 8% = 14.8%. Since the asset is priced to earn an 18% return, which is higher than the expected return of 14.8%, it is underpriced.

An Asset Is Priced to Earned an 18% Annual Return;