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Consider a multifactor model with two factors. The common stock of XYZ Corp. has a beta of 0.50 on factor 1 and a beta of
Consider a multifactor model with two factors. The common stock of XYZ Corp. has a beta of 0.50 on factor 1 and a beta of 1.30 on factor 2. The risk premiums on the factor 1 and factor 2 are 2% and 6%, respectively. The risk-free rate of return is 5%. The expected return on XYZ Corp is 15%. Within the context of this multifactor model, is the common stock of XYZ Corp. overpriced, underpriced or fairly priced?
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