The expected return on the market portfolio is 14 The riskfr

The expected return on the market portfolio is 14%. The risk-free rate is 7%. The expected return on SDA Corp. common stock is 13%. The beta of SDA Corp. common stock is 1.60. Within the context of the capital asset pricing model, ?SDA Stock is underpriced 0 SDA Corp. stock\'s alpha is-5.20% SDA stock is fairly priced ?SDA stock\'s alpha is 5.2%

Solution

required return= risk-free rate +Beta*(MArket rate- risk-free rate )

=[7+1.6*(14-7)]

=18.2%

Hence since required return is greater than the expected return;the stock is not underpriced or fairly priced.

Alpha of the stock=Expected return-[risk-free rate +Beta*(MArket rate- risk-free rate )]

=13-[7+1.6*(14-7)]

which is equal to

=-5.20%(B).(Negative figure).