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a. Suggest an example of an asset with zero beta. Explain whether an asset with zero beta offers an expected return of zero. (5 marks)

a. Suggest an example of an asset with zero beta. Explain whether an asset with zero beta offers an expected return of zero. (5 marks)

b. Milton considers buying the ABC stock. The ABC stock pays a constant dividend of $5 in perpetuity, and the beta of the ABC stock is 1.2. The risk-free rate is 4%, and the expected market return is 12%.

i. Compute the price of the ABC stock based on the CAPM. (5 marks)

ii. Suppose the market price of the ABC stock is $40. According to the CAPM, is the stock over-priced or under-priced? Should he buy the ABC stock? Explain. (4 marks)

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