Question

The reward-to-risk ratio for Stock X exceeds that of Stock Y. Stock X has a beta of 1.37 and Stock Y has a beta of.98. Given this, you know for certain that:

Question 21 options:

	Stock Y is undervalued as compared to Stock X.
	Stock X is undervalued and has less risk than stock Y.
	Stock X will plot above the security market line and Stock Y will plot below the line.
	Stock X is overvalued and has more risk than stock Y.
	Stock X is undervalued as compared to Stock Y.

Answer 1

The correct answer is Stock X is undervalued as compared to Stock Y

We have given that the reward to risk ratio of stock A is more than the stock B which shows that the stock A is plotted below the security market line thus resulting in the undervaluation also the beta if stock A is more than the stock B which shows that it is more riskier investment.

The Stock B has less reward to risk ratio means this stock is Overvalued and will be plotted above the security market line also the beta is less than 1 which shows that the stock is less riskier.