You have analyzed the following four securities and have estimated each securityʹs beta and what you...

You have analyzed the following four securities and have estimated each securityʹs beta and what you expect each security to return next year. The expected return on the market portfolio is 13%, and the relevant risk-free rate is 5.5%.

Security

Beta

Expected return (based on your analysis)

A

1.30

14.0%

B

0.85

12.5%

C

0.20

7.0%

D

2.10

28.0%

Based on your analysis, which of the securities is overpriced?

A) Security A

B) Security B

C) Security C

D) Security D

Expert Solution

According to the analysis using the CAPM model for calculating the required return on equity, security A is overpriced. Detailed explanation along with formula is given in the pictures below:-

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jeff jeffy answered 1 year ago

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