Assume that the risk-free rate of interest is 6% and the expected rate of return on the market is 16%.
a) A share of stock sells for $50 today. It will pay a dividend of $6 per share at the end of the year. Its beta is 1.2. What do investors expect the stock to sell for at the end of the year? [5 marks]
b) A stock has an expected rate of return of 4%. What is its beta?