OLG stock has a beta of 0.98 and an expected return of 10.52 percent.The risk-free rate of return is 3.02 percent,and the market rate of return is 10.47 percent.Which one of the following statements is true given this information?
A)OLG stock is correctly priced.
B)The return on OLG stock will graph above the security market line.
C)The expected return on OLG stock based on the capital asset pricing model is 10.13 percent.
D)OLG stock has more systematic risk than the overall market.
E)OLG stock is overpriced.

Question

Quizplus · Accepted Answer

E(r)= 0.0302 + 0.98(0.1047 − 0.0302)= 0.1009,or 10.09%
OLG stock is underpriced as its actual expected return exceeds the CAPM return.An underpriced stock graphs above the security market line as its return is greater than it should be based on the stock's level of risk.

OLG Stock Has a Beta of 0