Which One of the Following Stocks,if Any,is Correctly Priced According

question 6

Multiple Choice

Which one of the following stocks,if any,is correctly priced according to CAPM if the risk-free rate of return is 6.5 percent and the market rate of return is 10.5 percent? Stock A with a beta of .85 and an expected return of 9.22 percent;Stock B with a beta of 1.08 and an expected return of 11.90 percent;Stock C with a beta of 1.69 and an expected return of 15.38 percent;Stock D with a beta of 1.45 and an expected return of 12.30 percent.

• A)Stock A
• B)Stock B
• C)Stock C
• D)Stock D
• E)None of the stocks are correctly priced according to CAPM.

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Definitions:

Present Value

The current financial value of money to be obtained in the future or upcoming cash flow payments, quantified by a particular rate of return.

Cash Flows

The total amount of money being transferred in and out of a business, especially as affecting liquidity.

Investment

The expenditure of money with the expectation of achieving a profit or material result by putting it into financial schemes, shares, or property.

Present Value Factors

Multipliers used to determine the present value of future cash flows by accounting for the time value of money.