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A stock’s ß = 1.6. We observe rRF = 4% and E(rM) = 12%. At this...

A stock’s ß = 1.6. We observe rRF = 4% and E(rM) = 12%. At this moment in the stock market, the actual rate of return for the stock is 13%. Is the stock overvalued or undervalued? Explain.

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Stock CAPM Return CAPM Return>E(Ri) Classification Overpriced A 16.80% Yes =4%+1.6*(12%-4%)

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