The risk-free rate is 6% and the expected rate of return on the market portfolio is 13%. a. Calculate the required rate of return on a security with a beta of 1.25. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) Required return 22.25 % b. If the security is expected to return 16%, is it overpriced or underpriced

Question

Maci Mcpherson

Business

24 May, 23:59

The risk-free rate is 6% and the expected rate of return on the market portfolio is 13%. a. Calculate the required rate of return on a security with a beta of 1.25. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) Required return 22.25 % b. If the security is expected to return 16%, is it overpriced or underpriced

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Answers (1)

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Gina Wolfe · Answer 1

a. 14.75%

b. Under priced

Explanation:

The computation for the required rate of return is shown below:

a. Expected rate of return = Risk-free rate of return + Beta * (Market rate of return - Risk-free rate of return)

= 6% + 1.25 * (13% - 6%)

= 6% + 1.25 * 7%

= 6% + 8.75%

= 14.75%

b. As the required rate of return comes 14.75% and the required return is 16% so it is under priced as expected return is more than the required return