A share of stock is now selling for $130. It will pay a dividend of $6 per share at the end of the year. Its beta is 1. What do investors expect the stock to sell for at the end of the year? Assume the risk-free rate is 4% and the expected rate of return on the market is 20%. (Round your answer to 2 decimal places.)

Expected selling price $

I am buying a firm with an expected perpetual cash flow of $1,250 but am unsure of its risk. If I think the beta of the firm is zero, when the beta is really 1, how much more will I offer for the firm than it is truly worth? Assume the risk-free rate is 5% and the expected rate of return on the market is 20%. (Input the amount as a positive value.)

Present value difference

Suppose the yield on short-term government securities (perceived to be risk-free) is about 5%. Suppose also that the expected return required by the market for a portfolio with a beta of 1 is 15.0%. 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 %

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

Expected rate of return %

Suppose you consider buying a share of stock at a price of $60. The stock is expected to pay a dividend of $7 next year and to sell then for $63. The stock risk has been evaluated at = 0.5.

c-1. Using the SML, calculate the fair rate of return for a stock with a = 0.5. (Round your answer to 1 decimal place.)

Fair rate of return %

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 %

c-3. Is the stock overpriced or underpriced?

	Underpriced
	Overpriced