Which one of the following stocks is correctly priced if the risk-free rate of return is 3.9 percent and the market risk premium is 8.4 percent?

stock beta expected return
a 0.77 7.86%
b 1.55 12.65%
c 1.36 17.33%
d 1.33 11.93%
e 0.95 11.88%

E 0.95 11.88%

Explanation:

First we have to calculate the market return from market risk premium using the following formula:

Market risk premium=Market return-Risk free return

Market return=3.9%+8.4%=12.3%

Above market return will be applied to the Capital asset pricing model formula for the purpose of calculating expected return.

CAPM=Risk free return+Beta(Market return-Risk free return)

A.

Expected return=3.9%+0.77(12.3%-3.9%)=10.37%

Incorrect because the expected return is 10.37% as compared to the 7.86% given in question.

B.

Expected return=3.9%+1.55(12.3%-3.9%)=16.92%

Incorrect because the expected return is 16.92% as compared to the 12.65% given in question.

C.

Expected return=3.9%+1.36(12.3%-3.9%)=15.32%

Incorrect because the expected return is 15.32% as compared to the 17.33% given in question.

D.

Expected return=3.9%+1.33(12.3%-3.9%)=15.072%

Incorrect because the expected return is 15.072% as compared to the 11.93% given in question.

E.

CAPM=3.9%+0.95(12.3%-3.9%)=11.88%

Correct because the expected return is 11.88% as given in question.

So the correct option is E.

1) the stages a new product goes through from beginning to end, i.e., the stages that a product passes through from introduction through growth, maturity, and decline. 2) the time from initial research and development to the time at which sales and support of the product to customers are withdrawn. 3) the period of time during which a product can be produced and marketed profitably.

                                          hope it

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