A4 6 a Suppose we observe two stocks with the following characteristics: Stock Expected return Beta K 20% 1.6 L 12% 0.9 a. An asset is said to be overvalued if its price is too high given its expected...

A4 6 a

Suppose we observe two stocks with the following characteristics:

a. An asset is said to be overvalued if its price is too high given its expected return and risk. The risk-free rate is currently 6%. Is one of the two stocks overvalued relative to the other? Explain your answer fully (i.e., provide reasons why you think the stock is or is not overvalued).