Chapter 09 - The Capital Asset Pricing Model
28. Your opinion is that CSCO has an expected rate of return of 0.13. 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 A. underpriced by 3%. B. overpriced. C. fairly priced.
D. cannot be determined from data provided. E. underpriced by 5%.
11.5% ? [4% + 1.3(11.5% ? 4%)] = ?2.25%; therefore, the security is overpriced.
AACSB: Analytic Bloom's: Apply
Difficulty: Intermediate Topic: CAPM
29. Your opinion is that CSCO has an expected rate of return of 0.1375. 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 A. underpriced by 10%. B. overpriced. C. fairly priced.
D. cannot be determined from data provided. E. underpriced by 5%.
13.75% ? [4% + 1.3(11.5% ? 4%)] = 0.0%; therefore, the security is fairly priced.
AACSB: Analytic Bloom's: Apply
Difficulty: Intermediate Topic: CAPM
9-37
Chapter 09 - The Capital Asset Pricing Model
30. 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 A. underpriced.
B. overpriced by 10%. C. fairly priced.
D. cannot be determined from data provided. E. overpriced by 5%.
15% ? [4% + 1.3(11.5% ? 4%)] = 1.25%; therefore, the security is under priced.
AACSB: Analytic Bloom's: Apply
Difficulty: Intermediate Topic: CAPM
31. Your opinion is that Boeing has an expected rate of return of 0.112. It has a beta of 0.92. The risk-free rate is 0.04 and the market expected rate of return is 0.10. According to the Capital Asset Pricing Model, this security is A. underpriced.
B. overpriced by 7%. C. fairly priced.
D. cannot be determined from data provided. E. overpriced by 5%.
11.2% ? [4% + 0.92(10% ? 4%)] = 1.68%; therefore, the security is under priced.
AACSB: Analytic Bloom's: Apply
Difficulty: Intermediate Topic: CAPM
9-38
Chapter 09 - The Capital Asset Pricing Model
32. Your opinion is that Boeing has an expected rate of return of 0.0952. It has a beta of 0.92. The risk-free rate is 0.04 and the market expected rate of return is 0.10. According to the Capital Asset Pricing Model, this security is A. underpriced by 7%. B. overpriced. C. fairly priced.
D. cannot be determined from data provided. E. underpriced by 5%.
9.52% ? [4% + 0.92(10% ? 4%)] = 0.0%; therefore, the security is fairly priced.
AACSB: Analytic Bloom's: Apply
Difficulty: Intermediate Topic: CAPM
33. Your opinion is that Boeing has an expected rate of return of 0.08. It has a beta of 0.92. The risk-free rate is 0.04 and the market expected rate of return is 0.10. According to the Capital Asset Pricing Model, this security is A. underpriced by 3%. B. overpriced. C. fairly priced.
D. cannot be determined from data provided. E. underpriced by 1%.
8.0% ? ]4% + 0.92(10% ? 4%)] = ?1.52%; therefore, the security is overpriced.
AACSB: Analytic Bloom's: Apply
Difficulty: Intermediate Topic: CAPM
9-39
Chapter 09 - The Capital Asset Pricing Model
34. As a financial analyst, you are tasked with evaluating a capital budgeting project. You were instructed to use the IRR method and you need to determine an appropriate hurdle rate. The risk-free rate is 4 percent and the expected market rate of return is 11 percent. Your company has a beta of 1.0 and the project that you are evaluating is considered to have risk equal to the average project that the company has accepted in the past. According to CAPM, the appropriate hurdle rate would be ______%. A. 4 B. 7 C. 15 D. 11 E. 1
The hurdle rate should be the required return from CAPM or (R = 4% + 1.0(11% ? 4%) = 11%.
AACSB: Analytic Bloom's: Apply
Difficulty: Intermediate Topic: CAPM
35. As a financial analyst, you are tasked with evaluating a capital budgeting project. You were instructed to use the IRR method and you need to determine an appropriate hurdle rate. The risk-free rate is 4 percent and the expected market rate of return is 11 percent. Your company has a beta of 1.4 and the project that you are evaluating is considered to have risk equal to the average project that the company has accepted in the past. According to CAPM, the appropriate hurdle rate would be ______%. A. 13.8 B. 7 C. 15 D. 4 E. 1.4
The hurdle rate should be the required return from CAPM or (R = 4% + 1.4(11% ? 4%) = 13.8%.
AACSB: Analytic Bloom's: Apply
Difficulty: Intermediate Topic: CAPM
9-40
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