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:

Token Economy

A behavior modification method that uses tokens as a form of immediate reinforcement for exhibiting desired behaviors.

Classical Conditioning

The practice of learning through the repeated association of two stimuli; the response that is at first triggered by the second stimulus, is finally triggered by the first stimulus alone.

Systematic Desensitization

A therapeutic technique designed to reduce anxiety or fear by gradually exposing the patient to the object of their phobia in a controlled setting.

Operant Conditioning

A method of learning that occurs through rewards and punishments for behavior, encouraging the occurrence of desired behaviors.