41. The risk-free rate is 4 percent. The expected market rate of return is 11 percent....

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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.

Answer rating: 100% (QA)

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