The risk-free rate is 4%. The expected market rate of return is 11%. If you expect stock X with a beta of .8 to offer a rate of return of 12%, then you should ________.

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

Expected Market Rate

The anticipated return on investment in the financial markets based on current conditions and historical data.

Overpriced

A term describing an asset whose market price is considered higher than its intrinsic value.

Underpriced

Describes securities or assets that are selling for a price believed to be below their intrinsic or true value.