Ry = 4.9+1.45*7.4 = 15.63% > 13%
Rz = 4.9+0.9*7.4 = 11.56% < 12%
Therefore in accordance to CAPM valuation approach stock Y is overpriced and stock Z underpriced.
Stock Y has a beta of 1.45 and an expected return of 13 percent. Stock Z has a beta of 0.9 and an expected return of 12 percent.
Required:
If the risk-free rate is 4.9 percent and the market risk premium is 7.4 percent, are these stocks correctly priced?
