Art Van DeLay, a Hedge Fund manager at Kramerica Capital, is using the capital asset pricing model for making recommendations to his clients. His research department has developed the information shown in

Based on the information above, Van DeLay would most likely conclude:

A. The positive alpha for Stock X indicates it plots above the SML and is therefore overvalued relative to CAPM.

B. The Sharpe ratio for Stock X is 0.25, which is below that for Stock Y, thus the best value is to purchase Stock Y.

C. A long/short strategy that involves the purchase of Stock X and shorting of Stock Y.

D. B and C.

Table 1: Forecasted Returns 14.0% Standard Deviations 36% Beta 0.8 1.5 1.0 Stock X Stock Y 17.0% 25% Market Index Risk Free Rate 14.0% 5.0% 15%