1. The risk-free rate is 4.2 percent and the expected return on the market is 12.3 percent. Stock A has a beta of 1.2 and an expected return of 13.1 percent. Stock B has a beta of 0.75 and an expected return of 11.4 percent. Are these stocks correctly priced? Why or why not?

A. No, Stock A is underpriced and Stock B is overpriced.

B. No, Stock A is overpriced and Stock B is underpriced.

C. No, Stock A is overpriced but Stock B is correctly priced.

D. Yes, both stocks are correctly priced.  

2. Which one of the following is the slope of the security market line?

A. Risk-free rate

B. Market-risk premium

C. Beta coefficient

D. Risk premium on an individual asset

3. A project is expected to create operating cash flows of $26,500 a year for three years. The initial cost of the fixed assets is $55,000. These assets will be worthless at the end of the project. An additional $5,000 of net working capital will be required throughout the life of the project. What is the project's net present value if the required rate of return is 15 percent?

$1,566.67

$505.47

$8,793.05

$-1,206.95

$3,793.05