Union Pacific Corporation (ticker: UNP on NYSE) owns transportation companies. Its principal operating company, Union Pacific Railroad Company, links 23 states across the country.
After studying UNP's financials, you predict the future return on investment to be 8. The risk free rate is 4.5, the expected market return is 10 and UNP's beta is 0.6. Which of the following statements is true about UNP?
A) Equilibrium return < anticipated return, stock is undervalued
B) Equilibrium return > anticipated return, stock is overvalued
C) Equilibrium return > anticipated return, stock is undervalued
D) Equilibrium return < anticipated return, stock is overvalued
E) Equilibrium return = anticipated return, stock properly valued
Question 2
According to the efficient market theory,
A) Prices of actively traded stocks can be under- or over-valued in an efficient market.
B) Prices of actively traded stocks can only be under-valued in an efficient market.
C) Prices of actively traded stocks do not differ from their true values in an efficient market.
D) Prices of actively traded stocks can only be over-valued in an efficient market.
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