Question: 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 11.0%. 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 11
b. What would be the expected return on a zero-beta stock? Expected rate of return 4% Suppose you consider buying a share of stock at a price of $110. The stock is expected to pay a dividend of $10 next year and to sell then for $113. The stock risk has been evaluated at 8 -0.5.
c-1. Using the SML. calculate the fair rate of return for a stock with a B -0.5. (Round your answer to 1 decimal place.) Fair rate of return 0.5%
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 8.85
c-3. Is the stock overpriced or underpriced?