Suppose you are considering five stocks for investment purposes and the capital asset pricing model (CAPM) holds. Indicate if the stocks shown below are overpriced, underpriced or correctly priced and explain why? Assume that the risk-free rate of return is 3 percent and the market risk premium is 8 percent?

Stock Beta Expected Return (%) *

A 0.89 7.83

B 1.52 12.59

C 1.25 13.00

D 1.27 14.50

E 0.80 10.08

* Expected returns are based on current prices and expected prices in one year, not the CAPM.