The risk-free rate is 5 percent and the expected return on the market is 11 percent. Stock A has a beta of 1.2 and an expected return of 13 percent. Stock B has a beta of .86 and an expected return of 10 percent. Are these stocks correctly priced and why? answer: a

a. No; Stock A is underpriced and stock B is overpriced.

b. No; Stock A is overpriced and stock B is underpriced.

c. No; Stock A is overpriced but stock B is correctly priced.

d. No; Stock A is underpriced but stock B is correctly priced.

e. Yes; Both stocks are correctly priced.

I know that E(Ra) = 5% + 1.2(11%-5%) = 12.2%

and E(Rb) = 5% + 0.86(11%-6%) = 10.16%

Compared with expected return 13% and 10% --> I thought that A is overpriced & B is underpriced.