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Assume that the CAPM holds and expectations of stocks' returns and betas are correctly measured. Which statement is NOT correct? O a. Stock E has more systematic risk than the market portfolio. O b. Stock B is underpriced. O c. Stock D has a negative excess return (a negative alpha). O d. Rational investors should buy Stock C. O e. The price of Stock A will rise, and the excess return of Stock A will fall.

Assume that the CAPM holds and expectations of stocks' returns and betas are correctly measured. Which statement is NOT correct? O a. Stock E has more systematic risk than the market portfolio. O b. Stock B is underpriced. O c. Stock D has a negative excess return (a negative alpha). O d. Rational investors should buy Stock C. O e. The price of Stock A will rise, and the excess return of Stock A will fall.

ENGR.ECONOMIC ANALYSIS
ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN:9780190931919
Author:NEWNAN
Publisher:NEWNAN
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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The security market line (SML) shows the relationship between beta and expected return. The following graph shows stocks' betas (B) and expected returns (µ): SML E C A Pm В 1 Assume that the CAPM holds and expectations of stocks' returns and betas are correctly measured. Which statement is NOT correct? O a. Stock E has more systematic risk than the market portfolio. O b. Stock B is underpriced. O . Stock D has a negative excess return (a negative alpha). O d. Rational investors should buy Stock C. O e. The price of Stock A will rise, and the excess return of Stock A will fall.
Transcribed Image Text:The security market line (SML) shows the relationship between beta and expected return. The following graph shows stocks' betas (B) and expected returns (µ): SML E C A Pm В 1 Assume that the CAPM holds and expectations of stocks' returns and betas are correctly measured. Which statement is NOT correct? O a. Stock E has more systematic risk than the market portfolio. O b. Stock B is underpriced. O . Stock D has a negative excess return (a negative alpha). O d. Rational investors should buy Stock C. O e. The price of Stock A will rise, and the excess return of Stock A will fall.
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