1. Stock A’s Beta is 1.2, risk free rate is 5% and market portfolio’s return is expected to be 10%. What is the expected return of Stock A?
2. A share of stock sells for 50 today. It will pay a dividend of 6 at the end of the year. Its beta is1.2. T-bill rate is 6% and market expected return is 16%. What do investors expect the stock to sell for at the end of the year?
3. A. A mutual fund with beta of 0.8 has an expected rate of return of 14%. If risk free rate is 5% and you expect market return to be 15%, should you invest in this fund?
B. What passive portfolio comprised of a market-index portfolio and a money market account would have the same beta as the fund? Show that the difference between the expected rate of return on this passive portfolio and that of the fund equals the alpha from part A.