Stock A has a beta of .68 and an expected return of 8.1 percent.Stock B has a beta of 1.42 and an expected return of 13.9 percent.Stock C has beta of 1.23 and an expected return of 12.4 percent.Stock D has a beta of 1.31 and an expected return of 12.6 percent.Stock E has a beta of .94 and an expected return of 9.8 percent.Which one of these stocks is the most accurately priced if the risk-free rate of return is 2.5 percent and the market risk premium is 8 percent?
A)Stock A
B)Stock B
C)Stock C
D)Stock D
E)Stock E

Question

Quizplus · Accepted Answer

Stock B is the most accurately priced according to the Capital Asset Pricing Model (CAPM), which calculates the expected return as: Risk-Free Rate + Beta * (Market Risk Premium). For Stock B, the calculation is 2.5% + 1.42 * 8% = 13.86%, which is very close to its given expected return of 13.9%.

Stock a Has a Beta of