Assume that a stock has a beta coefficient of 1.2, the risk-free rate is 3% and the

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Assume that a stock has a beta coefficient of 1.2, the risk-free rate is 3% and the market risk premium is 7%. Answer the questions below.

a. What is the stock’s expected and required rates of return (assuming equilibrium conditions)?

b. What is the implied expected return on the market?

c. If, upon further analysis, an investor finds that the stock is expected to provide a 10% rate of return, is the stock over- or undervalued? Should the investor buy, hold or sell the stock?

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