Wilson Farms' stock has a beta of .84 and an expected return of 7.8 percent.The risk-free rate is 2.6 percent and the market risk premium is 6 percent.This stock is ________ because the CAPM return for the stock is ________ percent.
A) undervalued; 7.34
B) undervalued; 7.49
C) undervalued; 7.64
D) overvalued; 7.34
E) overvalued; 7.49

Question

Quizplus · Accepted Answer

E (R_A) = 2.6 + 0.84(6.0) = 7.64 percent The stock is undervalued because its expected return of 7.8 percent exceeds the CAPM return of 7.64 percent.

Wilson Farms' Stock Has a Beta of