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%