According to Yahoo Finance, COMPANY B has a Beta of 1.15. If the yield on Treasury bills is 2% and the appropriate market risk premium is 5%, what return would you expect from holding COMPANY B stock?

Multiple Choice

• 1.75%

• 2.75%

• 5.75%

• 7.75%

you calculated the return you expected from holding COMPANY B stock using the CAPM. However, when you plot this on the Security Market Line (SML), you find that it plots well above the SML. What conclusions can you draw from this observation?

Multiple Choice

• COMPANY B stock is under-valued. The stock price should rise until the stock once again plots along the SML

• COMPANY B stock is over-valued. The stock price should fall until the stock once again plots along the SML

• Neither of the above are true

• Both of the above are true