The risk-free rate is 4 percent.The expected market rate of return is 12 percent.If you expect stock X with a beta of 1.0 to offer a rate of return of 10 percent,you should
A)buy stock X because it is overpriced.
B)sell short stock X because it is overpriced.
C)sell stock short X because it is underpriced.
D)buy stock X because it is underpriced.
E)none of the above,as the stock is fairly priced.

Question

Quizplus · Accepted Answer

The expected return using the CAPM formula is 12% (risk-free rate + beta * (market return - risk-free rate)). Since stock X offers only 10%, it is overpriced, suggesting a short sell.

The Risk-Free Rate Is 4 Percent