The Risk-Free Rate Is 4

question 11

Multiple Choice

The risk-free rate is 4%. The expected market rate of return is 11%. If you expect share X with a beta of .8 to offer a rate of return of 12 per cent, then you should ________.

• A)buy share X because it is overpriced
• B)buy share X because it is underpriced
• C)sell short share X because it is overpriced
• D)sell short share X because it is underpriced

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Definitions:

Attachment

(1) In the context of secured transactions, the process by which a security interest in the property of another becomes enforceable. (2) In the context of judicial liens, a court-ordered seizure and taking into custody of property prior to the securing of a judgment for a past-due debt.

Unsecured Creditor

A creditor who lends money without obtaining specified assets as collateral, thus facing higher risk in case of borrower's bankruptcy.

Family Home

A primary residence where a family lives and conducts their daily activities.

Security Interest

A legal claim or lien on collateral that has been pledged, usually to secure repayment of a loan.