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) sell short CAT because it is overpriced.
C) sell short CAT because it is underpriced.
D) buy CAT because it is underpriced.
E) None of the options, as CAT is fairly priced.

Question

Quizplus · Accepted Answer

The expected return using CAPM is 11% (4% + 1.0*(11%-4%)). Since CAT's expected return of 13% is higher than the CAPM expected return, it is underpriced, and you should buy it.

The Risk-Free Rate Is 4