Stock A has a beta of 0.87 and an expected return of 9.21 percent.Stock B has a beta of 1.36 and an expected return of 10.58 percent.Stock C has a beta of 1.12 and an expected return of 10.68 percent.The risk-free rate is 2.7 percent,and the market risk premium is 6.8 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 = 0.027 + 0.87(0.068)= 0.0862,or 8.62% E(r)_B = 0.027 + 1.36(0.068)= 0.1195,or 11.95% E(r)_C = 0.027 + 1.12(0.068)= 0.1032,or 10.32% Stocks A and C are underpriced because their expected rate of return exceeds the CAPM rate.

Stock a Has a Beta of 0