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QUESTION 10 The CAPM-based return of stocks A, B, and C are estimated to be 12%,...

QUESTION 10

  1. The CAPM-based return of stocks A, B, and C are estimated to be 12%, 15%, and 17%,respectively. The actual or expected returns on stocks A, B, and C are 10%, 17%, and 15%.

    Which of the following statements about the pricing of stocks A, B, and C is correct?

    1.

    Stocks A, B, and C are underpriced, overpriced, and underpriced, respectively.
    2.

    Stocks A, B, and C are overpriced, underpriced, and overpriced, respectively.
    3.

    Stocks A, B, and C are underpriced, overpriced, and overpriced, respectively.
    4.

    Stocks A, B, and C are correctly priced.
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Answer #1

When CAPM return is more than expected return then security is overvalued .
When CAPM return is less than expected return than security is undervalued.
So security A and C are overpriced and security B is underpriced.
So correct answer is 2) Stocks A,B and C are overpriced, underpriced and overpriced respectively

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