The Risk-Free Rate Is 4

question 4

Multiple Choice

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

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

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Definitions:

Qualitative Change

Discontinuous changes in kind, structure, or organization.

Theories Change

The concept that scientific theories evolve over time as new evidence emerges and older explanations are refined or replaced.

Incorporate

To include or integrate a part into a whole.

Assumptions

Beliefs or statements taken for granted without proof.