Design Interior's Stock Has an Expected Return of 11

question 83

Multiple Choice

Design Interior's stock has an expected return of 11.00 percent and a beta of 1.4.The market return is 10.75 percent and the risk-free rate is 4.0 percent.This stock is ________ because the CAPM return for the stock is ________ percent.

• A) greatly overvalued; 13.45
• B) slightly overvalued; 12.91
• C) priced correctly; 13.25
• D) slightly undervalued; 12.91
• E) greatly undervalued; 13.45

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Definitions:

Total Product Curve

A graphical representation showing how the total quantity of output produced by a firm varies with the quantity of a variable input, keeping all other inputs constant.

Average Product

The output per unit of input, such as the quantity of goods produced per unit of labor.

Diminishing Returns

An economic principle stating that as investment in a particular area increases, the rate of profit from that investment, after a certain point, cannot continue to increase and may decrease.

Labor Input

The amount of work contributed by employees, measured in hours or effort, used in the production of goods and services.