Problem:
The risk-free rate is 4.2 percent and the expected return on the market is 12.3 percent. Stock A has a beta of 1.2 and an expected return of 13.1 percent. Stock B has a beta of 0.75 and an expected return of 11.4 percent.
Required:
Question: Are these stocks correctly priced? Why or why not?
Select one:
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.
Note: Solve the problem and show all work.