The expected return on the market portfolio is 15%. the risk-free rate is 8%. the return on sda corp. common stock turned to be 16%. the beta of sda corp. common stock is 1.25. within the context of the capital asset pricing model, sda corp.

a. stock is underpriced sda corp.
b. stock is fairly priced sda corp.
c. stock's alpha is -0.75% sda corp.
d. stock alpha is 0.75%

C. stock's alpha is -0.75% SDA Corp.

Explanation:

In this question, we apply the Capital Asset Pricing Model (CAPM) formula which is shown below

Expected rate of return = Risk-free rate of return + Beta × (Market rate of return - Risk-free rate of return)

For computing the price of the stock, first we have to compute the Expected rate of return which is shown below:

= 8% + 1.25 × (15% - 8%)

= 8% + 1.25 × 7%

= 8% + 8.75%

= 16.75%

Now the price would be

= Return on common stock - expected rate of return

= 16% - 16.75%

= -0.75%

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