Question

Chapter 9 1. The reward-to-systematic risk (beta) ratio is 7.7% and the risk-free rate is 4.2%. What is the expected return on a risky asset if the beta of that asset is .89? the security market line. 2. If a stock is overvalued, it will plot A. above B. on or above C. on D. on or below E. below 3. The stock of Healthy Eating, Inc., has a beta of.88. The risk-free rate is 3.8 percent and the market return is 9.6 percent. What is the expected return on Healthy Eating's stock?

Answer 1

1.

Using CAPM Model,

Expected Return = 0.042 + 0.89(0.077)

Expected Return = 11.05%

2.

Option E is correct

below

3.

Using CAPM Model,

Expected Return = 0.038 + 0.88(0.096 - 0.038)

Expected Return = 8.90%