The Common Stock of Alpha Manufacturers Has a Beta of 1.14

question 14

Multiple Choice

The common stock of Alpha Manufacturers has a beta of 1.14 and an actual expected return of 15.26 percent.The risk-free rate of return is 4.3 percent and the market rate of return is 12.01 percent.Which one of the following statements is true given this information?

• A)The actual expected stock return will graph above the Security Market Line.
• B)The stock is underpriced.
• C)To be correctly priced according to CAPM, the stock should have an expected return of 21.95 percent.
• D)The stock has less systematic risk than the overall market.
• E)The actual expected stock return indicates the stock is currently underpriced.

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