The market has an expected return of 10% and the risk-free rate is 4%.
Based on the security market line implied by this information,
which of the following securities are correctly priced and which are over/underpriced?
Beta Actual Return
Stock 1 0.60 7.00%
Stock 2 1.00 11.00%
Stock 3 1.30 12.00%
Stock 4 1.70 19.00%
Required return = risk free rate + Beta* (Market rate - risk free rate)
The solution computes Required Rate of Return by given appropriate formula.