An Asset Is Priced to Earned a 14% Annual Return;

question 34

Multiple Choice

An asset is priced to earned a 14% annual return; the asset has a beta of 1.4. The market risk premium is 7% and the risk free rate is 6%. The asset is

• A) underpriced.
• B) correctly priced.
• C) overpriced.
• D) cannot be determined with the information provided

---

Definitions:

Probabilities

The measure of the likelihood that an event will occur, expressed as a number between 0 and 1.

Decision Making

The process of making choices by identifying a decision, gathering information, and assessing alternative resolutions.

Error Management Theory

This evolutionary psychology theory suggests that humans are biased toward making the type of error that is less costly in terms of evolutionary fitness.

Interpretations

The act of explaining or making sense of information, events, or behaviors, often influenced by one's personal perspective or theoretical framework.