Home Interior's stock has an expected return of 13.25 percent and a beta of 1.4.The market return is 10.75 percent and the risk-free rate is 4.5 percent.This stock is ________ because the CAPM return for the stock is ________ percent.
A) greatly overvalued; 16.50
B) slightly overvalued; 14.91
C) priced correctly; 13.25
D) slightly undervalued; 12.91
E) greatly undervalued; 16.50

Question

Quizplus · Accepted Answer

E (R_A) = 4.5 + 1.4(10.75 − 4.5) = 13.25 percent The stock is priced correctly because its expected return of 13.25 percent is equal to the CAPM return of 13.25 percent.

Home Interior's Stock Has an Expected Return of 13