Question about Corp Fin

cross-ied

Q6 of Self test-Portfolio management (Schweser)

Expected return on an asset: 10.6%
Return according to CAPM: 10.9%
Market portfolio return: 10.4%

which one is correct out of these two and WHY?

A) sell (or short) the risky asset because its expected return is less that the equilibrium expected return on the market portfolio

C) sell (or short) the risky asset because its expected return is not sufficient to compensate for its market risk

cheers

thisisbrianly

Its C.

To decide if a stock is undervalued or overvalued you compare the stock's expected return to the return required from the CAPM. The return required from the CAPM is based on beta, which is a measure of the stock's market risk.