The risk-free rate is 4.2 percent and the expected return on the market is 12.3 percent.Stock A has a beta of 1.2 and an expected return of 13.1 percent.Stock B has a beta of 0.75 and an expected return of 11.4 percent.Are these stocks correctly priced? Why or why not?
A)No, Stock A is underpriced and Stock B is overpriced.
B)No, Stock A is overpriced and Stock B is underpriced.
C)No, Stock A is overpriced but Stock B is correctly priced.
D)No, Stock A is underpriced but Stock B is correctly priced.
E)Yes, both stocks are correctly priced.

Question

Quizplus · Accepted Answer

E(R_A) = 0.042 + 1.2(0.123 - 0.042) = 13.92 percentE(R_B) = 0.042 + 0.75(0.123 - 0.042) = 10.28 percentStock A is overpriced because its expected return lies below the security market line.

The Risk-Free Rate Is 4