The Risk-Free Rate Is 5

question 54

Multiple Choice

The risk-free rate is 5%. The expected market rate of return is 11%. If you expect stock X with a beta of 2.1 to offer a rate of return of 15%, you should

• A) buy stock X because it is overpriced.
• B) sell short stock X because it is overpriced.
• C) sell short stock X because it is underpriced.
• D) buy stock X because it is underpriced.
• E) None of the options, as the stock is fairly priced.

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Definitions:

Self-knowledge

One's understanding and awareness of their own personality, feelings, motives, and desires.

Introspection Theory

A psychological theory which suggests that the examination of one's own conscious thoughts and feelings can provide insight into one's behaviors and mental states.

Self-fulfilling Prophecy

A self-fulfilling prophecy is a prediction that directly or indirectly causes itself to become true, due to positive feedback between belief and behavior.

Cognitive Dissonance

An uncomfortable inconsistency among one’s actions, beliefs, attitudes, or feelings. People attempt to reduce it by making their actions, beliefs, attitudes or feelings more consistent with one another.