## To set up this question, you need to understand the concepts of risk-free rate, expected rate of return on the market portfolio, security beta, and expected rate of return.

Here's how you can set up the question:

1. Define the risk-free rate: The risk-free rate is the rate of return on a risk-free investment, such as a government bond. In this case, the risk-free rate is given as 6 percent.

2. Define the expected rate of return on the market portfolio: The expected rate of return on the market portfolio represents the average return of all investments in the market. Here, it is given as 14 percent.

3. Define the security beta: The security beta measures the sensitivity of a security's returns to the overall market returns. A beta higher than 1 indicates that the security is more volatile than the overall market, while a beta less than 1 indicates that the security is less volatile. In this case, the security has a beta of 1.25.

4. Define the expected rate of return on the security: The expected rate of return on the security is given as 16 percent.

Now, to determine if the security is overpriced or underpriced, you need to compare its expected rate of return with the required rate of return based on its risk level.

The required rate of return can be calculated using the capital asset pricing model (CAPM):

Required Rate of Return = Risk-Free Rate + Beta * (Expected Rate of Return on the Market Portfolio - Risk-Free Rate)

Plug in the values:

Required Rate of Return = 6% + 1.25 * (14% - 6%) = 6% + 1.25 * 8% = 16%

The required rate of return is 16%.

If the expected rate of return on the security is equal to the required rate of return, the security is considered fairly priced. If the expected rate of return is higher, the security is considered underpriced, and if it is lower, the security is considered overpriced.

In this case, the expected rate of return on the security is also 16 percent, which is equal to the required rate of return. Therefore, the security is considered fairly priced.

Overall, the security is neither overpriced nor underpriced based on the values given.