Characterize each company as underpriced, overpriced, or properly priced according to CAPM.

Company A: underpriced. CAPM says that company A has a risk-free rate of 3% with a market risk premium of 5%. The expected return of this company is 8% but the current price is only 6%. This means that Company A’s price is too low when compared with its competitors.

Company B is overpriced. It is overpriced. Company B, therefore, appears overvalued on the market in relation to its expected returns.

Pricing of company C is appropriate. With a Risk-Free Rate of 4% and a Market Risk Premium of 9%, Company C’s expected return should be 13%. Data shows it’s trading exactly at 13%. This is a proper price according to the CAPM.