Stock A has a beta of .92 and an expected return of 9.04 percent.Stock B has a beta of 1.04 and an expected return of 9.51 percent.Stock C has a beta of 1.36 and an expected return of 11.68 percent.The risk-free rate is 3 percent and the market risk premium is 6.5 percent.Which of these stocks are underpriced?
A)A only
B)C only
C)A and B only
D)B and C only
E)A and C only

Question

Quizplus · Accepted Answer

E(r)_A = .03 + .92 × .065 = .0898,or 8.98%E(r)_B = .03 + 1.04 × .065 = .0976,or 9.76%E(r)_C = .03 + 1.36 × .065 = .1184,or 11.84%Stock A is underpriced because its expected rate of return exceeds the CAPM rate of return.

Stock a Has a Beta of