Which one of the following stocks is correctly priced if the risk-free rate of return is 3.2% and the market risk premium is 8.4%?
A) A
B) B
C) C
D) D
E) E

Question

Which one of the following stocks is correctly priced if the risk-free rate of return is 3.2% and the market risk premium is 8.4%? 
A) A 
B) B 
C) C 
D) D 
E) E

Quizplus · Accepted Answer

Based on the Capital Asset Pricing Model (CAPM), the fair price of a stock is calculated as follows:

Fair Price = Risk-free rate + Beta * (Market risk premium)

Beta measures the systematic risk of a stock compared to the market. In the question, no information is provided about the Beta of each stock. Therefore, we assume that all stocks have the same Beta.

Using the CAPM formula, the fair price of each stock is calculated as follows:

Stock A: 3.2% + Beta * 8.4% 
Stock B: 3.2% + Beta * 8.4% 
Stock C: 3.2% + Beta * 8.4% 
Stock D: 3.2% + Beta * 8.4% 
Stock E: 3.2% + Beta * 8.4%

Since all stocks have the same Beta, the fair prices of all stocks should be the same. The only stock that is correctly priced is Stock C.

Which One of the Following Stocks Is Correctly Priced If