You determine that XYZ common stock has an expected return of 24%.XYZ has a Beta of 1.5.The risk-free rate is 5%,and the market expected return is 15%.Which of the following is most likely to happen?
A) You and other investors will buy up XYZ stock and its price will rise.
B) You and other investors will sell XYZ stock and its return will fall.
C) You and other investors will buy up XYZ stock and its return will rise.
D) You and other investors will sell XYZ stock and its price will fall.

Question

Quizplus · Accepted Answer

The expected return of XYZ stock (24%) is higher than the required return calculated using the CAPM (5% + 1.5*(15%-5%) = 20%). This suggests the stock is undervalued, leading investors to buy it, causing its price to rise.

You Determine That XYZ Common Stock Has an Expected Return