The market rate of return is 11 percent and the risk-free rate of return is 3 percent.Lexant stock has 3 percent less systematic risk than the market and has an actual return of 12 percent.This stock:
A)is underpriced.
B)is correctly priced.
C)will plot below the security market line.
D)will plot on the security market line.
E)will plot to the right of the overall market on a security market line graph.

Question

Quizplus · Accepted Answer

The actual return of the stock is higher than what is expected based on the market rate of return and its lower systematic risk. Therefore, the stock is underpriced and should have a higher price to correspond with its actual return.

The Market Rate of Return Is 11 Percent and the Risk-Free