The common stock of Alpha Manufacturers has a beta of 1.14 and an actual expected return of 15.26 percent.The risk-free rate of return is 4.3 percent and the market rate of return is 12.01 percent.Which one of the following statements is true given this information?
A)The actual expected stock return will graph above the Security Market Line.
B)The stock is underpriced.
C)To be correctly priced according to CAPM, the stock should have an expected return of 21.95 percent.
D)The stock has less systematic risk than the overall market.
E)The actual expected stock return indicates the stock is currently underpriced.

Question

Quizplus · Accepted Answer

E(r) = 0.043 + 1.14 (0.1201 - 0.043) = 13.09 percentThe stock is underpriced because its actual expected return is greater than the CAPM return.

The Common Stock of Alpha Manufacturers Has a Beta of 1.14