Exhibit 7-9
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S)

Multiple Choice

Exhibit 7-9
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S)
Stocks A, B, and C have two risk factors with the following beta coefficients. The zero-beta return (λ₀) = .025 and the risk premiums for the two factors are (λ₁) = .12 and (λ₀) = .10.
$\begin{array}{ccc}\text { Stock } & \text { Factor } 1 b_{i l} & \text { Factor } 2 b_{i 2} \\\hline \text { A } & -0.25 & 1.1 \\\text { B } & -0.05 & 0.9 \\\text { C } & 0.01 & 0.6\end{array}$
-Refer to Exhibit 7-9. Suppose that you know that the prices of stocks A, B, and C will be $10.95, 22.18, and $30.89, respectively. Based on this information

A) All three stocks are overvalued.
B) All three stocks are undervalued.
C) Stock a is undervalued, stock b is properly valued, stock c is undervalued.
D) Stock a is undervalued, stock b is properly valued, stock c is overvalued.
E) Stock a is overvalued, stock b is overvalued, stock c is undervalued.