Here are data on two companies. The T-bill rate is 4% and the market risk...
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- Here are data on two companies. The T-bill rate is 4% and the market risk premium is 6%.
| Company | $ 1 Discount Store | Everything $5 |
| Forecast return | 12% | 11% |
| Standard deviation of returns | 8% | 10% |
| Beta | 1.5 | 1 |
A) What would be the expected rate of return for each company, according to the Capital asset pricing model (CAPM).
B) Characterize each company as underpriced, overpriced, or properly priced.
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