Q1) Risk-free rate is 4%. Expected market rate of return is 11%. If you expect stock X with the beta of .8 to offer rate of return of 12 percent, then you must __________.
A) Buy stock X because it is overpriced
B) Buy stock X because it is underpriced
C) Sell short stock X because it is overpriced
D) Sell short stock X because it is underpriced
Q2) Security A has the expected rate of return of 12% and beta of 1.10. Market expected rate of return is 8% and risk-free rate is 5%. Alpha of stock is __________.
Q3) What is expected return on stock with beta of 0.8, given a risk free rate of 3.5% and expected market return of 15.6%?