We have the following information on Stocks A and B. The risk-free rate is S the market risk premium is 7.5%. Assume that the market portfolio is corre priced. Based on the reward-to-risk ratio, are Stocks A and B overpriced, underpriced, or correctly priced?

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
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We have the following information on Stocks A and B. The risk-free rate is 5%, and
the market risk premium is 7.5%. Assume that the market portfolio is correctly
priced. Based on the reward-to-risk ratio, are Stocks A and B overpriced,
underpriced, or correctly priced?
Stock A
Stock B
Expected return
1196
16.25%
Beta
0.8
1.5
Transcribed Image Text:We have the following information on Stocks A and B. The risk-free rate is 5%, and the market risk premium is 7.5%. Assume that the market portfolio is correctly priced. Based on the reward-to-risk ratio, are Stocks A and B overpriced, underpriced, or correctly priced? Stock A Stock B Expected return 1196 16.25% Beta 0.8 1.5
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