Under/Over Valued Stock A manager believes his firm will earn a 10.90 percent return next year. His firm has a beta of 1.36, the expected return on the market is 8.6 percent, and the risk-free rate is 3.6 percent. Compute the return the firm should earn given its level of risk and determine whether the manager is saying the firm is under-valued or over-valued.
10.40%, over-valued
15.296%, over-valued
15.296%, under-valued
10.40%, under-valued