Question: CAPM and Security Pricing Stock A has an expected return of 26% and a beta of 2.1. Stock B has an expected return of 26%

CAPM and Security Pricing Stock A has an expected return of 26% and a beta of 2.1. Stock B has an expected return of 26% and a beta of 1.7 when the risk free rate is 6%. Which of the following statements are correct?

I. Stock A is underpriced relative to Stock B

II. Stock B is underpriced relative to Stock A

III. This situation is inconsistent with the CAPM

IV. This situation is consistent with the CAPM

Multiple Choice

II and IV only
II and III only
I and III only
I and IV only

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