BBG stock has a beta of .86 and an expected return of 9.51 percent.The risk-free rate of return is 3.26 percent and the market rate of return is 11.14 percent.Which one of the following statements is true given this information?
A)BBG stock is correctly priced.
B)The return on BBG stock will graph below the security market line.
C)The expected return on BBG stock based on the capital asset pricing model is 9.88 percent.
D)BBG stock has more systematic risk than the overall market.
E)BBG stock is underpriced.

Question

Quizplus · Accepted Answer

E(r)= .0326 + .86 × (.1114 - .0326)= .1004,or 10.04%BBG stock is overpriced as its actual expected return is less than the CAPM return.An overpriced stock graphs below the security market line as its return is less than it should be based on the stock's level of risk.

BBG Stock Has a Beta of