6.

You strongly believe in the CAPM and have recently identified a stock that you estimate to have a Beta of 1.5. At the same time you observe that the one year US Treasury bill yield is 0.8% and know that the average annual return to the SPY ETF has been 7% per year. Given that this stock has consistently earned about 10% per year then which of the following statements are likely true?

Select one or more:

a.

I should short this stock

b.

I should long this stock

c.

I feel this stock to be overvalued

d.

I feel this stock to be undervalued

e.

I need to assume the SPY is a decent proxy for the entire market in order to have necessary inputs

f.

I need to assume stationarity of returns in order to make a decision with this model