Stock Y Has a Beta of 1

question 98

Multiple Choice

Stock Y has a beta of 1.28 and an expected return of 13.7 percent.Stock Z has a beta of 1.02 and an expected return of 11.4 percent.What would the risk-free rate have to be for the two stocks to be correctly priced relative to each other?

• A)2.38 percent
• B)2.76 percent
• C)3.23 percent
• D)3.69 percent
• E)4.08 percent

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Definitions:

Compounded Monthly

This refers to the interest calculation method where interest is added to the principal balance monthly, causing the amount of interest to grow each month based on the new balance.

Mortgage

A loan secured by real property, typically real estate, that the borrower is obliged to pay back with a predetermined set of payments.

Compounded Monthly

Describes a situation where interest is added to the principal balance of a loan or deposit on a monthly basis, increasing the amount of future interest.

Compounded Monthly

An interest calculation method where the interest earned each month is added to the principal, becoming the base for calculating future interest.