The Risk-Free Rate Is 3

question 32

Multiple Choice

The risk-free rate is 3.7 percent and the expected return on the market is 12.3 percent.Stock A has a beta of 1.1 and an expected return of 13.1 percent.Stock B has a beta of .86 and an expected return of 11.4 percent.Are these stocks correctly priced? Why or why not?

• A)No, Stock A is underpriced and Stock B is overpriced.
• B)No, Stock A is overpriced and Stock B is underpriced.
• C)No, Stock A is overpriced but Stock B is correctly priced.
• D)No, Stock A is underpriced but Stock B is correctly priced.
• E)No, both stocks are overpriced.

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Definitions:

Universal Donor

A term often associated with blood type O negative, referring to individuals whose red blood cells can be transfused into persons of any other blood type without causing an adverse reaction.

Blood Type

The classification of human blood based on the presence or absence of inherited antigenic substances on the surface of red blood cells.

Vaccine

A biological preparation that improves immunity to a particular disease, typically containing an agent resembling a disease-causing microorganism.

Antigens

Foreign substances that induce an immune response in the body, especially the production of antibodies.