The risk-free rate (rRFrRF) is 4%, and the market risk premium (RPMRPM) is 5%. Use the following graph of the security market line (SML) to plot each stocks beta and expected return on the graph.

Stock AStock BStock C00.20.40.60.81.01.21.41.61.82.01614121086420RATE OF RETURN (Percent)RISK (Beta)

A stock is in equilibrium if its expected return its required return. In general, assume that markets and stocks are in equilibrium (or fairly valued), but sometimes investors have different opinions about a stocks prospects and may think that a stock is out of equilibrium (either undervalued or overvalued). Based on the analysts expected return estimates, Stock A is , Stock B is , and Stock C is in equilibrium and fairly valued.