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Which one of the following stocks is over-priced if the risk-free rate of return is 3.0 percent and the market risk premium is 7.5 percent?
Which one of the following stocks is over-priced if the risk-free rate of return is 3.0 percent and the market risk premium is 7.5 percent?
Stock | Beta | Expected Return | ||||
A | .66 | 8.46 | % | |||
B | 1.12 | 12.47 | ||||
C | 1.27 | 11.19 | ||||
D | 1.44 | 13.80 | ||||
E | 1.45 | 15 | ||||
Hint: Being over-priced means the stock's expected return is lower than what it should be, while being under-priced means the stock's expected return is too high.
Stock C
Stock D
Stock A
Stock E
Stock B
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