41. The risk-free rate is 4 percent. The expected market rate of return is 11 percent....
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
41. The risk-free rate is 4 percent. The expected market rate of return is 11 percent. If you expect CAT with a beta of 1.0 to offer a rate of return of 13 percent, you should A. buy stock X because it is overpriced. B. sell short stock X because it is overpriced. C. sell stock short X because it is underpriced. D. buy stock X because it is underpriced. E. none of the above, as the stock is fairly priced. 13% > 4% +1.0(11% -4%) = 11.0%; therefore, stock is under priced. 41. The risk-free rate is 4 percent. The expected market rate of return is 11 percent. If you expect CAT with a beta of 1.0 to offer a rate of return of 13 percent, you should A. buy stock X because it is overpriced. B. sell short stock X because it is overpriced. C. sell stock short X because it is underpriced. D. buy stock X because it is underpriced. E. none of the above, as the stock is fairly priced. 13% > 4% +1.0(11% -4%) = 11.0%; therefore, stock is under priced.
Expert Answer:
Related Book For
Posted Date:
Students also viewed these finance questions
-
The risk free rate of interest on government securities in 2013 is 7.3% Required: Prepare a report for the directors of In Style Pty. Ltd assessing its: a) Profitability. b) Efficiency. |2013 |2012 y...
-
The risk free rate is 7%, the return in the market is 10%, and the beta is 1.30. What return must you receive to be satisfied that you are being fairly compensated for the risk of the firm?
-
A stock is selling for $55. The risk free rate is 3% and the return on the stock have a standard deviation of 30%. Using a one step binomial tree, the forecasted up node what is price of the stock in...
-
A reducing elbow in a horizontal pipe is used to deflect water flow by an angle u = 45? from the flow direction while accelerating it. The elbow discharges water into the atmosphere. The cross-...
-
Pierres Hair Salon is considering opening a new location in French Lick, California. The cost of building a new salon is $300,000. A new salon will normally generate annual revenues of $70,000, with...
-
What influences the motivation to resolve a recognized problem?
-
Universal Health Care (UHC) is a company whose stock price has declined by 40% in the past year. In the current year, UHC earned \($300\) million in pretax operating income on revenues of \($10\)...
-
Klandon Company manufactures decorative rocks for aquariums. Kim Klandon is preparing the budget for the quarter ended June 30. She has gathered the following information. 1. Klandons sales manager...
-
2. The following accounts balances were extracted from the books of Rindu Sayang Sdn Bhd for the accounting period ending 31 May 2015. Debit Credit RM RM Capital 420,000 Motor Vehicle 200,000 Land...
-
You are the owner of a small business that manages the program, food, and merchandise sales at the Excel Center, where the local professional basketball team plays. In addition to basketball games,...
-
Identify and discuss the situations that may lead to being forced out of business.
-
Consider the following four departments (A, B, C and D) in this facility layout diagram: An average of 25 customers travel between departments A and C each day, and an average of 10 customers travel...
-
ART Contractors must locate an equipment staging area to serve three construction sites, located at coordinates (0, 2), (0, 4), and (5, 5). Traffic between the staging area and each of the three...
-
A manufacturing firm is considering two locations for a plant to produce a new prod- uct. Location A has a fixed cost of \($80,000\) and a variable cost of \($20\) per unit. Loca- tion B has a fixed...
-
A manufacturing firm is considering two locations for a plant to produce a new product. Location A has a fixed cost of \($80,000\) and a variable cost of \($20\) per unit. Location B has a fixed cost...
-
A friend complains that a 20-ounce bottle of Pambula Springs water costs \($5\) to purchase during a concert at a local sports arena, yet an identical bottle of Pambula Springs costs only \($2\) to...
-
Small business operators are required to produce various financial reports. What are financial reports and to whom should they be distributed?
-
1. Below is depicted a graph G constructed by joining two opposite vertices of C12. Some authors call this a "theta graph" because it resembles the Greek letter 0. a. What is the total degree of this...
-
You have a $100,000 portfolio made up of 15 stocks. You trade each stock five times this year and each time you trade, you pay about $30 in commissions and spread. You have no special knowledge, so...
-
You are thinking of making an investment in a new plant. The plant will generate revenues of $1 million per year for as long as you maintain it. You expect that the maintenance costs will start at...
-
Anzio, Inc., has two classes of shares. Class B has ten times the voting rights as Class A. If you own 10% of the class A shares and 20% of the Class B shares, what percentage of the total voting...
-
Contractors Ltd was formed on 1 January 19X6 and the following purchases and sales of machinery were made during the first 3 years of operations. Each machine was estimated to last 10 years and to...
-
The financial year of H Saunders ended on 31 December 19X6. Show the ledger accounts for the following items including the balance transferred to the necessary part of the final accounts, also the...
-
On 1 January 19X8 the following balances, among others, stood in the books of M Baldock, a sole trader: (a) Rates, 104 (Dr); (b) Packing materials, 629 (Dr). During the year ended 31 December 19X8...
Study smarter with the SolutionInn App