The risk-free rate is 8% and the expected rate of return on the market portfolio is 13%. a. Calculate the required return of a security with a beta of 1.13 and an expected rate of return of 16%. (Do not round intermediate calculations. Round your answer to 2 decimal places.) Required return % b. Is the security overpriced or underpriced? Underpriced Explanation: a. Required return = rf + β(rm − rf) = 8% + [1.13 × (13% − 8%)] = 13.65% Expected return = 16% b. The security is underpriced. Its expected return is greater than the required return given its risk.

The risk-free rate is 8% and the expected rate of return on the market portfolio is 13%.

a.	Calculate the required return of a security with a beta of 1.13 and an expected rate of return of 16%. (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Required return

%

b.	Is the security overpriced or underpriced?
	Underpriced

Explanation:

a.

Required return = rf + β(rm − rf) = 8% + [1.13 × (13% − 8%)] = 13.65%

Expected return = 16%

b.

The security is underpriced. Its expected return is greater than the required return given its risk.