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An analyst expects a risk-free return of 4.5 percent, a market return of 14.5 percent, and the returns for Stocks A and B that are shown in the following table.

Stock         Beta         Analyst’s Estimated Return

A                  1.2                         16%

B                  0.8                         14%

a. Show on the graph

(1) Where Stock A and B would plot on the security market line (SML) if they were fairly valued using the capital asset pricing model (CAPM)

(2) Where Stock A and B actually plot on the same graph according to the returns estimated by the analyst and shown in the table

b. State whether Stock A and B are undervalued or overvalued if the analyst uses the SML for strategic investment decisions.