Question: The expected market return: Rm = 12%. The expected return on a risk-free asset: Rf = 5%. a) Stock A has a beta of 0.8.

The expected market return: Rm = 12%. The expected return on a risk-free asset: Rf = 5%.

a) Stock A has a beta of 0.8. What is the expected return of stock A according to CAPM? If stock A offers an actual return of 7%, is stock A overvalued or undervalued?

b) Stock B offers a return of 15%. If stock B is correctly priced by CAPM, what is the beta of Stock B?

c) Project C has a forecasted return of 7% and a beta of 0.6. Should we accept project C? Why?

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