A Stock Has a Beta of 1

question 88

Multiple Choice

A stock has a beta of 1.25.The risk free rate is 5% and the return on the market is 6%.The estimated return for the stock is 14%.According to the CAPM you should

• A) Sell because it is overvalued.
• B) Sell because it is undervalued.
• C) Buy because it overvalued.
• D) Buy because it is undervalued.
• E) Short because it is undervalued.

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Definitions:

Common Stock

A type of equity security representing ownership in a corporation, with rights to dividends and voting in shareholder meetings.

Legal Expense

Costs incurred by a company for legal services, including attorney fees, court costs, and other related expenses.

Paid-In Capital

The total amount of money or other value that shareholders have contributed to a company in exchange for shares of stock, indicating the funds raised from equity rather than from ongoing operations.

Par Value

The face value of a bond or the nominal value of a stock, as stated by the issuing company in its charter.