stock #1 has a beta of 1.3 and an expected return of 18 percent. Stock #1 has a beta of .75 and an expected return of 10 percent. The risk free rate is 3 percent and the expected return of the market 11.4%. Plot these statistics out as securities market lines. Are the expected returns for each stock too high/low given their level of risk. What implication would this have for whether or not they are correctly priced?

ANSWER: market r/r ratio = 8.4%; stock R r/r = 11.53%, stock S r/r ratio = 9.33% both stocks are undervalued compared to the market stock 2 is overvalued compared to stock 1

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