Within the context of the capital asset pricing model (CAPM), assume:
• Expected return on the market = 15 percent
• Risk- free rate = 8 percent
• Expected rate of return on XYZ security = 17 percent
• Beta of XYZ security = 1.25 Which one of the following is correct?
a. XYZ is overpriced.
b. XYZ is fairly priced.
c. XYZ’s alpha is 2.25 percent.
d. XYZ’s alpha is .25 percent.