USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Consider the Three

question 72

Multiple Choice

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Consider the three stocks, stock X, stock Y, and stock Z, that have the following factor loadings (or factor betas) .
The zero-beta return ( $\lambda$ 0) = 3 percent, and the risk premia are $\lambda$ 1 = 10 percent and $\lambda$ 2 = 8 percent. Assume that all three stocks are currently priced at $50.
-Refer to Exhibit 7.9. If you know that the actual prices one year from now are stock X $55, stock Y $52, and stock Z $57, then

• A) stock X is undervalued, stock Y is undervalued, and stock Z is undervalued.
• B) stock X is undervalued, stock Y is overvalued, and stock Z is overvalued.
• C) stock X is overvalued, stock Y is undervalued, and stock Z is undervalued.
• D) stock X is undervalued, stock Y is overvalued, and stock Z is undervalued.
• E) stock X is overvalued, stock Y is overvalued, and stock Z is undervalued.

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Definitions:

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