Exhibit 7-9
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S)
Stocks A, B, and C have two risk factors with the following beta coefficients. The zero-beta return (λ 0 ) = .025 and the risk premiums for the two factors are (λ 1 ) = .12 and (λ 0 ) = .10.
$\begin{array}{ccc}
\text { Stock } & \text { Factor } 1 b_{i l} & \text { Factor } 2 b_{i 2} \
\hline \text { A } & -0.25 & 1.1 \
\text { B } & -0.05 & 0.9 \
\text { C } & 0.01 & 0.6
\end{array}$
-Refer to Exhibit 7-9. Suppose that you know that the prices of stocks A, B, and C will be $10.95, 22.18, and $30.89, respectively. Based on this information
A) All three stocks are overvalued.
B) All three stocks are undervalued.
C) Stock a is undervalued, stock b is properly valued, stock c is undervalued.
D) Stock a is undervalued, stock b is properly valued, stock c is overvalued.
E) Stock a is overvalued, stock b is overvalued, stock c is undervalued.

Question

Exhibit 7-9
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S)
Stocks A, B, and C have two risk factors with the following beta coefficients. The zero-beta return (λ 0 ) = .025 and the risk premiums for the two factors are (λ 1 ) = .12 and (λ 0 ) = .10.
 $\begin{array}{ccc}
\text { Stock } & \text { Factor } 1 b_{i l} & \text { Factor } 2 b_{i 2} \
\hline \text { A } & -0.25 & 1.1 \
\text { B } & -0.05 & 0.9 \
\text { C } & 0.01 & 0.6
\end{array}$
-Refer to Exhibit 7-9. Suppose that you know that the prices of stocks A, B, and C will be $10.95, 22.18, and $30.89, respectively. Based on this information
A) All three stocks are overvalued.
B) All three stocks are undervalued.
C) Stock a is undervalued, stock b is properly valued, stock c is undervalued.
D) Stock a is undervalued, stock b is properly valued, stock c is overvalued.
E) Stock a is overvalued, stock b is overvalued, stock c is undervalued.

Quizplus · Accepted Answer

The expected return for each stock can be calculated using the formula: Expected Return = Zero-beta return + (Factor 1 beta * Risk premium 1) + (Factor 2 beta * Risk premium 2). Comparing these expected returns with the given prices, Stock A and Stock C are undervalued, while Stock B is properly valued.

Exhibit 7-9 USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S)

Exhibit 7-9
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S)