James is evaluating the expected performance of two common stocks, stock A and stock B. he has gathered the following information:
- The risk-free rate is 5%
- The expected return on the market portfolio is 11.5%
- The beta of stock A is 1.5
- The beta of stock B is 0.8
Based on his own analysis, James’ forecast of the returns on the two stocks are 13.25% for stock A and 11.25% for stock B. Calculate the required rate of return for stock A and B. Briefly explain whether each stock is undervalued, overvalued, or fairly valued.
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