Problem:
Suppose the risk free rate is 4%. Suppose also that the expected return required by the market for a portfolio with a beta of 1.0 is 9%. Suppose you consider buying a share of stock at a price of $42. The stock is expected to pay a dividend of $3 next year and to sell then for $41. The stock risk has been evaluates at beta of 1.2.
(1) Is the stock overpriced or underpriced according to the capital asset pricing model?
(2) What might be the (current) fair price of the stock?