The risk-free rate is 4%. The expected market rate of return is 11%. If you expect CAT with a beta of 1.0 to offer a rate of return of 13%, you should A. buy CAT because it is overpriced. B. buy CAT because it is underpriced. C. None of the options, as CAT is fairly priced. D. sell short CAT because it is overpriced. E. sell short CAT because it is underpriced.

The risk-free rate is 4%. The expected market rate of return is 11%. If you expect CAT with a beta of 1.0 to offer a rate of return of 13%, you should A. buy CAT because it is overpriced. B. buy CAT because it is underpriced. C. None of the options, as CAT is fairly priced. D. sell short CAT because it is overpriced. E. sell short CAT because it is underpriced.

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter3: Risk And Return: Part Ii

Section: Chapter Questions

Problem 2Q: Security A has an expected rate of return of 6%, a standard deviation of returns of 30%, a...

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Question

The risk-free rate is 4%. The expected market rate of return is 11%. If you expect CAT with a beta of 1.0 to offer a rate of return of 13%, you should

A. buy CAT because it is overpriced.

B. buy CAT because it is underpriced.

C. None of the options, as CAT is fairly priced.

D. sell short CAT because it is overpriced.

E. sell short CAT because it is underpriced.

Definition Definition Percentage gain or loss from a specific investment over time. The rate of return is the difference between the closing and initial values of an investment divided by the initial value of the investment. The closing value includes any intermediate cash flows such as dividends or interest amounts.

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