Question

The market rate of return is 11 percent and the risk-free rate of return is 3 percent. Lexant stock has 3 percent less systematic risk than the market and has an actual return of 12 percent. This stock:

Answer 1

over-priced

Step-by-step explanation:

According to the capital asset price model: Expected rate of return = risk free + beta x (market rate of return - risk free rate of return)

Systemic risk are risk that are inherent in the economy. They cannot be diversified away. They are also known as market risk. examples of this risk include recession, inflation, and high interest rates. Investors should seek compensation for systemic risk. Systemic risk is measured by beta. The higher beta is, the higher the systemic risk and the higher the compensation demanded for by investors

The market has a beta of one. If a portfolio has the same level of systematic risk that is the same as that of the market, its beta would be equal to 1.

If the portfolio is less risky than the market, its beta would be less than one

If the portfolio is more risky than the market, its beta would be greater than one

Lexant stock beta = (100 - 3) x 1

0.97 x 1 = 0.97

3 + 0.97(11 -3)

3 + 8.25

10.76