The Expected Return of the Market Is 12 Percent, and the Risk-Free

Multiple Choice

The expected return of the market is 12 percent, and the risk-free rate is 4.5 percent. Stock K has a beta of 1.2 and an expected return of 14.2 percent. Stock L has a beta of 0.85 and an expected return of 10.3 percent. From this information, Stock K is ______ and Stock L is _______.

A) overpriced; overpriced
B) overpriced; underpriced
C) underpriced; underpriced
D) underpriced; overpriced
E) Insufficient information.