179k views
2 votes
Your opinion is that CSCO has an expected rate of return of 0.15. It has a beta of 1.3. The risk-free rate is 0.04 and the market expected rate of return is 0.115. According to the Capital Asset Pricing Model, this security is

User Rlarroque
by
7.9k points

1 Answer

4 votes

Answer:

Overpriced

Step-by-step explanation:

The computation is shown below;

As we know that

Expected rate of return = risk free rate + beta × ( expected market rate of return - risk free rate )

= 0.04 + 1.3 × (0.115 - 0.04)

= 0.1375

As the return of the security is 0.1375 i.e. more than the expected rate of return i.e. 0.115

Hence, it is overpriced

User Shadowtalker
by
8.7k points
Welcome to QAmmunity.org, where you can ask questions and receive answers from other members of our community.