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Stock A has a beta of 1 and stock B has a beta of 3. The market return is 10% and the risk-free rate is
Stock A has a beta of 1 and stock B has a beta of 3. The market return is 10% and the risk-free rate is 2%. The average stock returns over the past year were 5% for stock A and 30% for stock B. Which of the following statements is correct?
- Stock A is underpriced relative to what is implied by the CAPM.
- Stock B is underpriced relative to what is implied by the CAPM.
- Stock B had a lower average return relative to the return implied by the CAPM.
- None of the statements above is correct.
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