CFA Practice Question

There are 294 practice questions for this study session.

CFA Practice Question

The risk-free interest rate is 5 percent and the return on market portfolio is 8 percent. A stock with a beta of 0.5 that has an estimated rate of return of 7 percent is most likely ______.
A. undervalued
B. overvalued
C. correctly valued
Explanation: The required return = E(Ri)= RFR + Bi (E(Rm)- RFR) = 5 +0.5(8-5) = 6.5. But the estimated return is 7%. Therefore, the stock is undervalued because its estimated return, given the risk, lies above the SML, i.e., 7% > 6.5%.

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