Stock a has a beta of .92 and an expected return of 9.04 percent. stock b has a beta of 1.04 and an expected return of 9.51 percent. stock c has a beta of 1.36 and an expected return of 11.68 percent. the risk-free rate is 3 percent and the market risk premium is 6.5 percent. which of these stocks are underpriced?

Stock A

Explanation:

We will calculate the Capital Assets Pricing Model or each stock and look for one underpriced

All shares face the same market premium and risk-free rate:

risk freerate=0.03

premium market= (market rate - risk free)=0.065

Stock A

beta(non diversifiable risk)0.92

Ke0.08980= 8.98%expected return 9.04%

The CAPM cost of capital is lower than his expected return, therefore, for CAPM this stock is underprices as the expected return is greater than his cost of capital.

Stock B

beta(non diversifiable risk)1.04

Ke0.09760= 9.76%    expected return 9.51%

The CAPM cost of capital is greater than his expected return, therefore, for CAPM this stock is overpriced as the expected return is lower than his cost of capital

Stock C

beta(non diversifiable risk)1.36

Ke0.11840= 11.84%     expected return 11.68%

The CAPM cost of capital is greater than his expected return, therefore, for CAPM this stock is overpriced as the expected return is lower than his cost of capital

answer; /// the above statement is (true);

answer; bootstrapping is your answer;