Which one of the following shares is correctly priced (rounded up to one decimal place) if the risk-free rate of return is 2.5 % and the market risk premium is 8%?
$\begin{array} { | l | l | l | }
\hline \text { Share } & \text { Beta } & \text { Expected Return } \
\hline \text { A } & 68 & 8.2 \% \
\hline B & 1.42 & 13.9 \% \
\hline \text { C } & 1.23 & 11.8 \% \
\hline \text { D } & 1.31 & 12.6 \% \
\hline \text { E } & 94 & 9.7 \% \
\hline
\end{array}$
A)A
B)B
C)C
D)D
E)E

Question

Which one of the following shares is correctly priced (rounded up to one decimal place) if the risk-free rate of return is 2.5 % and the market risk premium is 8%?
$\begin{array} { | l | l | l | } 
\hline \text { Share } & \text { Beta } & \text { Expected Return } \
\hline \text { A } & 68 & 8.2 \% \
\hline B & 1.42 & 13.9 \% \
\hline \text { C } & 1.23 & 11.8 \% \
\hline \text { D } & 1.31 & 12.6 \% \
\hline \text { E } & 94 & 9.7 \% \
\hline
\end{array}$
A)A
B)B
C)C
D)D
E)E

Quizplus · Accepted Answer

The correct pricing of shares can be determined using the Capital Asset Pricing Model (CAPM), which is given by the formula: $$E(R_i) = R_f + \beta_i(E(R_m) - R_f)$$ where $E(R_i)$ is the expected return on the investment, $R_f$ is the risk-free rate of return, $\beta_i$ is the beta of the investment, and $E(R_m) - R_f$ is the market risk premium.For share B, using the given values:- $R_f = 2.5\%$- $\beta_i = 1.42$- Market risk premium = $8\%$$$E(R_i) = 2.5\% + 1.42(8\%) = 2.5\% + 11.36\% = 13.86\%$$Rounded up, this matches the expected return for share B (13.9%), making it correctly priced according to the CAPM.

Which One of the Following Shares Is Correctly Priced (Rounded