Home Interior's Stock Has an Expected Return of 13

question 64

Multiple Choice

Home Interior's stock has an expected return of 13.25 percent and a beta of 1.4.The market return is 10.75 percent and the risk-free rate is 4.5 percent.This stock is ________ because the CAPM return for the stock is ________ percent.

• A) greatly overvalued; 16.50
• B) slightly overvalued; 14.91
• C) priced correctly; 13.25
• D) slightly undervalued; 12.91
• E) greatly undervalued; 16.50

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Definitions:

Normal Good

A good that has a positive income elasticity, so that as consumer income rises, demand for the good rises, too.

Market Supply

The total quantity of a good or service that sellers are willing and able to sell at a given price over a specific period.

Elasticity

Elasticity refers to the measure of how much the quantity demanded or supplied of a good changes in response to a change in price.

Normal Good

A good for which demand increases as the income of consumers increases and decreases as the income of consumers decreases.