Which one of the following stocks is correctly priced if the risk-free rate of return is 3.6 percent and the market risk premium is 8.1 percent? Stock Beta Expected Return
A. 89 7.83%
B. 1.52 12.59
C. 1.25 11.27
C 1.27 14.50
D. 80 10.08

Stock of D is correctly priced at 10.08%

( for the beta of Stock A and D, I guessed you meant  0.89 and 0.80 respectively as opposed to 89 and 80 you put, so i corrected and solved accordingly.)

Explanation:

Expected return = Rf + beta ( Rm - Rf )

Rf =Risk free return = 3.6

Rm-Rf = Market risk premium = 8.1%

A) Stock Beta , Expected Return=   0.89,  7.83%

Expected return = 3.6 + 0. 89 (8.1) = 10.809%-- its over priced

B) Stock Beta , Expected Return=   1.52 12.59%

Expected return = 3.6 +  1.52(8.1) = 15.912% its over priced

B) Stock Beta , Expected Return=   1.25 11.27%

Expected return = 3.6 +  1.25(8.1) = 13.725 %--- its overpriced

c) Stock Beta , Expected Return=   1.27 14.50%

Expected return = 3.6 +  1.27(8.1) = 13.887% Its underpriced

d) Stock Beta , Expected Return=    0.80 10.08%

Expected return = 3.6 + 0. 80(8.1) =  10.08% Correctly priced

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