Design Interior's stock has an expected return of 10% and a beta of 1.1. The market return is 9.5% and the risk-free rate is 2.0%. This stock is ________ because the CAPM return for the stock is ________%.
A)greatly overvalued; 13.45
B)slightly overvalued; 10.25
C)priced correctly; 9.5
D)slightly undervalued; 10.25
E)greatly undervalued; 13.45

Question

Quizplus · Accepted Answer

The CAPM return is calculated as: Risk-free rate + Beta * (Market return - Risk-free rate) = 2.0% + 1.1 * (9.5% - 2.0%) = 10.25%. Since the expected return is 10%, which is less than the CAPM return of 10.25%, the stock is slightly overvalued.

Design Interior's Stock Has an Expected Return of 10% and a Beta