I think my brain is fried, I just did a stalla question which should be pretty simple. I calculated expected return for a stock using CAPM to be 9.4%. The forecast one-year return on the stock is 12% (given). a) do not recommend stock b) recommend stock to clients c) do more research which is the correct answer?



b right?..above SML means security is undervalued.

I agree, B is correct CAPM is not the realized return unless market is in equilibrium. If my forecast is higher than CAPM assumed return then the security is underpriced in the mkt.

yes its B