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a. Question 3 Suppose the yield on short-term government securities (perceived to be risk-free) is about 2.50%. Suppose also that the expected return on the
a. Question 3 Suppose the yield on short-term government securities (perceived to be risk-free) is about 2.50%. Suppose also that the expected return on the market portfolio is 10%. Draw a fully labeled diagram that shows the security market line. b. According to the capital asset pricing model, i. What is the expected return on a zero-beta stock? ii. Suppose Martin considers buying 1,000 shares of stock of XYZ Company at a price of $40. The stock is expected to pay a dividend of $2 per share next year and to sell then for $42 per share. The stock risk has been evaluated at the beta of 0.5. Calculate the alpha for the XYZ stock. Is the stock overpriced or underpriced? Explain
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