Question

the risk-free rate is 4% and the expected rate of return on the market portfolio is 9%. calculate the required rate of return on a security with a beta of 1.28. note: do not round intermediate calculations. enter your answer as a percent rounded to 2 decimal places. if the security is expected to return 12%, is it overpriced or underpriced?

Answer 1

The required rate of return on a security with a beta of 1.28 can be calculated using the CAPM formula. The required rate of return is 12.2%. If the security is expected to return 12%, it is not overpriced or underpriced.

Step-by-step explanation:

The required rate of return on a security can be calculated using the Capital Asset Pricing Model (CAPM) formula:

Required Rate of Return = Risk-Free Rate + Beta * (Expected Rate of Return on the Market Portfolio - Risk-Free Rate)

Given that the risk-free rate is 4%, the expected rate of return on the market portfolio is 9%, and the beta of the security is 1.28, we can plug in these values into the formula:

Required Rate of Return = 4% + 1.28 * (9% - 4%) = 12.2%

Therefore, the required rate of return on the security with a beta of 1.28 is 12.2%.

If the security is expected to return 12%, it is neither overpriced nor underpriced. The expected rate of return on the security matches the required rate of return, indicating that it is priced correctly according to its risk level.