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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Definitions:

Sedimentary Rocks

Rocks formed by the deposition and subsequent cementation of mineral or organic particles on the floor of oceans, lakes, or rivers.

Folds

Structures formed by the bending and warping of rock layers due to pressure and heat in the Earth's crust.

Permeable Sandstone

A type of sandstone that allows fluids to pass through it due to spaces between the sand grains, making it important for water and hydrocarbon reservoirs.

Impermeable Shale

A type of shale rock so compact that it does not allow fluids to pass through it, often creating a barrier for groundwater movement.