An Asset Has a Beta of 2

question 39

Multiple Choice

An asset has a beta of 2.0 and an expected return of 20%.The expected risk premium on the market portfolio is 5% and the risk-free is 7%.The stock is

• A) overpriced
• B) underpriced
• C) appropriately priced
• D) Cannot tell from the given information

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Definitions:

Exposure To Risk

Exposure to risk refers to the potential for loss or adverse outcomes faced by individuals or entities, stemming from various sources such as financial transactions, natural disasters, or security threats.

Risk-Averse

A characteristic of individuals preferring outcomes with certain, lower returns compared to outcomes with uncertain, potentially higher returns.

Risk Aversion

The behavior of individuals who, when exposed to uncertainty, would prefer to choose an outcome with a more certain but possibly lower payoff over an outcome with a higher payoff but more uncertainty.

Equilibrium Premium

The price level at which supply and demand for a financial instrument, such as insurance, are balanced, minimizing the risk of loss for insurers.