A stock has a beta of the stock is 1.25. The risk free rate is 5% and the return on the market is 6%. The estimated return for the stock is 14%. According to the CAPM you should
A) Sell because it is overvalued.
B) Sell because it is undervalued.
C) Buy because it overvalued.
D) Buy because it is undervalued.
E) Short because it is undervalued.

Question

Quizplus · Accepted Answer

E(R) = 5 + 1.25(6 - 5) = 7.25%. The stock is undervalued.

A Stock Has a Beta of the Stock Is 1