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.

Question

Quizplus · Accepted Answer

The expected rate of return for CAT is higher than the expected market rate of return. This means that CAT is expected to perform better than the market as a whole, and is therefore underpriced relative to its expected return. The fact that CAT has a beta of 1.0 is not relevant in this case, as it only indicates that its returns are expected to move in line with the market. Therefore, buying CAT is the best choice.

The Risk-Free Rate Is 4