Question
. Company A has a beta of 0.70, while Company B's beta is 1.45. The required return on the stock market is 9.00%, and the
. Company A has a beta of 0.70, while Company B's beta is 1.45. The required return on the stock market is 9.00%, and the risk-free rate is 2.25%.
a) What is the difference between A's and B's required rates of return? Do not round your intermediate calculations
b) Assume that you wake up today, and find out that A and Bs return today is 10.08% and 12.04%, respectively. Are these two stocks overprice or underpriced? Why?
c) According to the answer of question (b), are rational investors going to buy or sell stocks A and B? Discuss the dynamics of the stock movement.
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