Question

Asset E(R) Std. deviation A 30% 50% Market (M) 20% 20% Above is the expected return...

Asset

E(R)

Std. deviation

A

30%

50%

Market (M)

20%

20%

Above is the expected return and standard deviation of a stock A and the market portfolio. The correlation coefficient between A and the market portfolio (M) is 0.6. The risk-free rate is 4%

Based on CAPM, stock A is _____________ because it offers an alpha of ________.

A.

underpriced;10.0%
B.

overpriced; 2.0%
C.

underpriced; 2.0%
D.

underpriced; 4.0%
E.

overpriced; -4.0%   
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Answer #1

The answer is Option "C" i.e underpriced; 2.0%

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