Capital Asset Pricing Model Evaluation of Stocks

Hard Portfolio Risk And Return Capital Asset Pricing Model

Consider a scenario with three stocks: Stock A, Stock B, and Stock C. Their respective betas and expected returns are as follows:

Stock A: Beta = 1.2, Expected Return = 10%
Stock B: Beta = 0.8, Expected Return = 7%
Stock C: Beta = 1.5, Expected Return = 12%

Assuming the risk-free rate is 3%, which of the following statements is correct regarding these stocks when applying the Capital Asset Pricing Model (CAPM)?

Stock A is overpriced because its expected return is less than the CAPM expected return.

Stock B is fairly priced as it matches the CAPM predicted return.

Stock C is underpriced since it exceeds the CAPM expected return.

Hint

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