Suppose the yield on short-term government securities (perceived to be risk-free) is about 4%. Suppose also that the expected return required by the market for a portfolio with a beta of 1 is 10.0%. According to the capital asset pricing model:
a. What is the expected return on the market portfolio? (Round your answer to 1 decimal place.)
Expected rate of return %
b. What would be the expected return on a zero-beta stock?
Expected rate of return %
Suppose you consider buying a share of stock at a price of $75. The stock is expected to pay a dividend of $9 next year and to sell then for $78. The stock risk has been evaluated at ? = –.5.
c-1. Using the SML, calculate the fair rate of return for a stock with a ? = –0.5.
Fair rate of return %
c-2. Calculate the expected rate of return, using the expected price and dividend for next year. (Round your answer to 2 decimal places.)
Expected rate of return %
c-3. Is the stock overpriced or underpriced?
Underpriced
Overpriced