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 percent, 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
Answer: B. Buy stock X because it is underpriced