Assume that the market (M), stocks A have the following characteristics: Stock Expected Return Standard Deviation A 4% 40.3% M 6.5% 15% The risk-free rate is 3%. The correlation for stock return with the market is Corr(RetA, RetM) = 0.35 First, calculate the betas for stock A. According to the CAPM, comment on whether stocks A is underpriced or overpriced, and whether it is above or below the Security Market Line (SML).

 

Stock Expected Return A M 4% 6.5% Standard Deviation 40.3% 15%