Recently You Have Received a Tip That the Stock of Buttercup

question 5

Multiple Choice

Recently you have received a tip that the stock of Buttercup Industries is going to rise from $76.00 to $85.00 per share over the next year.You know that the annual return on the S&P 500 has been 13% and the 90-day T-bill rate has been yielding 3% per year over the past 10 years.If beta for Buttercup is 1.0,will you purchase the stock?

• A) Yes, because it is overvalued.
• B) Yes, because it is undervalued.
• C) No, because it is undervalued.
• D) No, because it is overvalued.
• E) Yes, because the expected return equals the estimated return.

---

Definitions:

Increase in Demand

A situation in which more of a product or service is desired, leading to a shift of the demand curve to the right.

Ceteris Paribus

A phrase in Latin that translates to "with all other conditions remaining the same," employed to examine the impact of a single variable while holding others constant in economic studies.

Equilibrium Price

The price at which the quantity of a good or service demanded equals the quantity supplied, leading to market equilibrium.

Equilibrium Quantity

The amount of products or services available and sought after at the market's balance price.