Information about three stocks is provided below:
| Stock | Expected Return | Beta |
| Booraem Inc. | 12.85% | 1.5 |
| Heisen Inc. | 11.27% | 1.1 |
| Gutmann Inc. | 9.51% | 0.8 |
If the expected market return is 9.5% and the average risk-free rate is 1.2%, according to the capital asset pricing model (CAPM) and the security market line (SML), which of the three stocks is most likely overvalued?
B is correct.8ooraem Inc. is overvalued because it lies below the SML. The expected return,12.85%, is less than the required return. According to the CAPM, the required return for Booraem Inc. is 0.1365 or 13.65%:
0.1365 = 0.012 + 1.5(0.095 - 0.012).