Home Interior's stock has an expected return of 13.2 percent and a beta of 1.28.The market return is 10.7 percent and the risk-free rate is 2.8 percent.This stock is _____ because the CAPM return for the stock is _____ percent.
A)greatly overvalued; 16.50
B)slightly overvalued; 12.91
C)priced correctly; 12.89
D)slightly undervalued; 12.91
E)greatly undervalued; 16.50

Question

Quizplus · Accepted Answer

E (R_A) = 2.8 + 1.28(10.7 - 2.8) = 12.91 percentThe stock is slightly undervalued because its expected return of 13.2 percent is more than the CAPM return of 12.91 percent.

Home Interior's Stock Has an Expected Return of 13