Within the context of the capital asset pricing model (CAPM), assume: Expected return on the market

Question:

Within the context of the capital asset pricing model (CAPM), assume:

• Expected return on the market = 15 percent

• Risk- free rate = 8 percent

• Expected rate of return on XYZ security = 17 percent

• Beta of XYZ security = 1.25 Which one of the following is correct?

a. XYZ is overpriced.

b. XYZ is fairly priced.

c. XYZ’s alpha is 2.25 percent.

d. XYZ’s alpha is .25 percent.

Capital Asset Pricing Model
The Capital Asset Pricing Model (CAPM) describes the relationship between systematic risk and expected return for assets, particularly stocks. The CAPM is a model for pricing an individual security or portfolio. For individual securities, we make use of the security market line (SML) and its... Expected Return
The expected return is the profit or loss an investor anticipates on an investment that has known or anticipated rates of return (RoR). It is calculated by multiplying potential outcomes by the chances of them occurring and then totaling these...