1. Suppose the yield on short-term government securities (perceived to be risk-free) is about 3%. Suppose also that the expected return required by the market for a portfolio with a beta of 1 is 13.5%. According to the capital asset pricing model:

a. What is the expected return on the market portfolio?

b. What would be the expected return on a zero-beta stock?

c. Suppose you consider buying a share of stock at a price of $41. The stock is expected to pay a dividend of $2 next year and to sell then for $43. The stock risk has been evaluated at beta = -.5. Is the stock overpriced or underpriced?