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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 __________.

 

A) -1.7%

 

B) 3.7%

 

C) 5.5%

 

D) 8.7%

 

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%?

 

A) 3.8%

 

B) 13.2%

 

C) 15.6%

 

D) 19.1%

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