Let’s suppose the return on the market is expected to be 15%, and the stock we are analyzing has a beta of 1.3, and the T-bill rate is 2.5%. Further, you think the stock should return 16%.
A) What does the SML predict as an expected return for this stock?
B) What is this stock’s alpha?
C) Is the stock over- or underpriced?
PLEASE SHOW ALL WORK