43.9
9.You are examining stock B. Its beta is 1.3, the expected return
on the market is 12% and the risk free rate is 3%. Assume that
Stock B is currently priced to yield an expected return of 15%.
Is it underpriced or overpriced? (3)
If you go through and do the CAPM for this stock, you see that it should be priced to earn 14.7% expected return. Since it is priced to earn more than that, it is priced to low (its price needs to rise to lower the expected return to new purchasers of stock B). Thus, it is underpriced.