Home Interior's Stock Has an Expected Return of 12

question 65

Multiple Choice

Home Interior's stock has an expected return of 12.89 percent and a beta of 1.28. The market return is 10.7 percent and the risk-free rate is 2.8 percent. This stock is _____ because the CAPM return for the stock is _____ percent.

• A) greatly overvalued; 16.50
• B) slightly overvalued; 12.91
• C) priced correctly; 12.89
• D) slightly undervalued; 12.91
• E) greatly undervalued; 16.50

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Definitions:

Tristearin

A triglyceride derived from stearic acid, commonly found in animal and vegetable fats, used in the production of soaps and cosmetics.

B-carotene

A highly pigmented orange compound that is a precursor to vitamin A, found in various fruits and vegetables and used as a dietary supplement.

Phosphatidic Acid

A phospholipid that acts as a key intermediate in the biosynthesis of many other lipids.

Prostaglandin

A group of physiologically active lipid compounds having diverse hormone-like effects in animals.