A stock has beta of 1.29 and an estimated expected return of 13.9 percent. The market portfolio has expected return of 12.1 percent and risk free rate of 3.8 percent. Assuming the CAPM holds, stock A is: A) underpriced B) overpriced C) fairly priced D) cannot be determined
Added by Thomas W.
Step 1
8% + 1.29 x (12.1% - 3.8%) Expected return = 15.4% The estimated expected return of the stock is 13.9%, which is lower than the calculated expected return of 15.4%. This means that the stock is underpriced, as it has the potential to generate higher returns than Show more…
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