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Stock Priced Correctly

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Which one of the following stocks is correctly priced if the risk-free rate of return is 3.2 percent and the market rate of return is 11.76 percent?

Stock Beta Expected Return
A 0.87 11.03%
B 1.09 12.50%
C 1.18 13.21%
D 1.34 15.02%
E 1.62 17.07%

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Solution Summary

This solution shows exactly how to calculate the stocks with the information given. The correct answer is shown by calculation, to arrive at the stock that is correctly priced with a risk free rate of return at 3.2% and a market rate of return at 11.76%.

Solution Preview

A = 0.032 + [0.87 x (0.1176 - 0.032)] = 0.1065; correct = 11.03

B = 0.032 + [1.09 x ...

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