Asked by Robert Brownlee Jr on Jun 13, 2024
Verified
The risk-free rate is 4%. The expected market rate of return is 11%. If you expect stock X with a beta of .8 to offer a rate of return of 12%, then you should ________.
A) buy stock X because it is overpriced
B) buy stock X because it is underpriced
C) sell short stock X because it is overpriced
D) sell short stock X because it is underpriced
Expected Market Rate
The anticipated return on investment in the financial markets based on current conditions and historical data.
Overpriced
A term describing an asset whose market price is considered higher than its intrinsic value.
Underpriced
Describes securities or assets that are selling for a price believed to be below their intrinsic or true value.
- Familiarize oneself with the fundamental constituents and repercussions of the Capital Asset Pricing Model (CAPM).
Verified Answer
CV
Chris ViechecJun 13, 2024
Final Answer :
B
Explanation :
E(rx) would normally be .04 + .8(.11 - .04) = .096
Learning Objectives
- Familiarize oneself with the fundamental constituents and repercussions of the Capital Asset Pricing Model (CAPM).