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CAPM and Expected Return

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If the risk-free rate is 6 percent and the expected rate of return on the market portfolio is 14 percent, is a security with a beta of 1.25 and an expected rate of return of 16 percent overpriced or underpriced?

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Solution Summary

The solution calculates Expected Return using Capital Asset Pricing Model (CAPM) and finds out whether security is underpriced or overpriced.

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CAPM (Capital Asset Pricing Model equation is:
r A= r f + beta A (r m - r f)

risk free ...

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