The risk-free rate is 4 percent.The expected market rate of return is 11 percent.If you expect CAT with a beta of 1.0 to offer a rate of return of 10 percent,you should

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According to the Capital Asset Pricing Model (CAPM), the expected rate of return of a stock is determined by the risk-free rate, the expected market rate of return, and the stock's beta. A stock is considered overpriced if its expected rate of return is lower than the required rate of return based on CAPM. In this case, CAT's expected rate of return is 10 percent, which is lower than the required rate of return of 11 percent based on the CAPM. This suggests that CAT is overpriced, and investors should sell short CAT to take advantage of the overpricing. Therefore, the best choice is B: sell short CAT because it is overpriced.

The Risk-Free Rate Is 4 Percent