Based on Your Analysis, You Believe That Alpha Stock Which

question 84

Multiple Choice

Based on your analysis, you believe that Alpha stock which has a beta of 1.32 is going to yield 14.05% this coming year. The market is expected to yield 11.4% and T-bills are yielding 3.8%. According to CAPM, which one of these statements is correct given this information?

• A) The stock is currently underpriced.
• B) The stock plots below the security market line.
• C) The risk premium on the stock is too low given the stock's beta.
• D)The stock plots to the left of the market on a security market line graph.

---

Definitions:

Opportunity Costs

The cost of forgoing the next best alternative when making a decision, representing the benefits one misses out on.

Trading Costs

Expenses associated with buying and selling securities, including broker commissions and the bid-ask spread.

Total Costs

The sum of all expenses incurred in the production of goods or services, including both fixed and variable costs.

Net Present Value

A method used in capital budgeting to evaluate and compare the profitability of investments, which calculates the difference between the present value of cash inflows and outflows.