Question

Question 20 (1 point) Consider the information on American Technologies, Inc. shown below: American Technologies, Inc. Beta = 0.5 Expected rate of return: 9.5% If the expected return on the Market is 9.8 %, should you include American Technologies, Inc. in a diversified stock portfolio? (without calculations) a) No, the stock's expected return is lower than the expected return on the market. b) No, the stock's expected return is most likely lower than its required return c) Yes, the stock's expected return is lower than the market return d) Yes, the stock's required return is greater than the market return e) Yes, the stock's expected return is most likely greater than its required return Previous Page Next Page Page 20 of 26

Answer 1

As per CAPM, Required rate of return = Risk free rate + beta*(Market Return – Risk free return)

Market return = 9.8%

Stock Beta = 0.5

The answer is

e)Yes, Expected Return is most likely higher than required return

Expected Return = 9.5%

Since beta is 0.5, the required return on stock will be much lower than the market return of 9.8%

Hence, required return is most likely lower