Suppose the rate of return on short-term government securities (perceived to be risk-free) is about 6%. Suppose also that the expected rate of return required by the market for a portfolio with a beta of 1 is 14%. According to the capital asset pricing model:
a. What is the expected rate of return on the market portfolio? (Round your answer to 2 decimal places. Omit the "%" sign in your response.)
Expected rate of return %
b. What would be the expected rate of return on a stock with β = 0? (Round your answer to 2 decimal places. Omit the "%" sign in your response.)
Expected rate of return %
c. Suppose you consider buying a share of stock at $50. The stock is expected to pay $3 dividends next year and you expect it to sell then for $53. The stock risk has been evaluated at β = -.5. Is the stock overpriced or underpriced?
Underpriced
Overpriced