Question
a. Suppose you consider buying a share of stock at $65. The stock is expected to pay $5 dividends next year and you expect it
a. Suppose you consider buying a share of stock at $65. The stock is expected to pay $5 dividends next year and you expect it to sell then for $71. Determine the expected return of this stock. Round your answer to 2 decimal places. b. Suppose the rate of return on government securities is about 4.5%, the expected rate of return on the market portfolio is 18%. According to CAPM, determine the expected return of this stock if the stock risk has been evaluated at = 0.85. Interpret your result and round your answer to 2 decimal places. c. With reference to the answer in (a) and (b), discuss whether the stock is overpriced or underpriced. Explain your answer.
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