Question

Stock y has a beta of 1.25 and an expected return of 12.6 percent. stock z has a beta of .8 and an expected return of 9.9 percent. required: what would the risk-free rate have to be for the two stocks to be correctly priced relative to each other? (do not round intermediate calculations. enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)

Answer 1

Answer: E(Ry)=.041+(.07)(1.25)=12.85% >12.6 overvalued E(Rz)=.041+(.07)(.8)=9.7% < 9.9% undervalued