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 0.87 and an expected return of 11.4 percent. are these stocks correctly priced?

Thus, both the stocks are not priced properly.

Stock A is priced less by 13.92 - 13.1 = 0.82%

Stock B is priced over by 11.4 - 11.247 = 0.153%

Explanation:

Using Capital Asset Pricing Model we have,

Expected return on stock = Rf + Beta(Rm - Rf)

Where Rf = Risk free rate of return

Rm = Expected return on market

Beta = Risk volatility of stock in relation to market

For Stock A

We have expected return = 13.1%

Actual expected return as computed = 4.2 + 1.2(12.3 - 4.2)

= 4.2 + 9.72 = 13.92%

For Stock B

We have expected return = 11.4%

Actual expected return as computed = 4.2 + 0.87 (12.3 - 4.2)

= 4.2 + 7.047 = 11.247%

Thus, both the stocks are not priced properly.

Stock A is priced less by 13.92 - 13.1 = 0.82%

Stock B is priced over by 11.4 - 11.247 = 0.153%

answer; (c) canada,mexico and the united states. i do believe this is the correct answer; /// good luck

rational decision making is a multi-step process for making choices between alternatives. the process of rational decision making favors logic, objectivity, and analysis over subjectivity and insight. the word “rational” in this context does not mean sane or clear-headed as it does in the colloquial sense.

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