Assume that the CAPM is true. Stock 1 has a price of $60 and a beta of 0.7. The stock is expected to pay an annual dividend of $1.35 one year from now. Stock 2 has a beta of 1 and its expected return is 7.1%. Stock 3 has a beta of 1.5 and its expected return is 8.6%.

Attempt 2/99 for 10 pts.

Part 1

What is the expected return on the market portfolio?

Correct

Since the market portfolio has a beta of 1.0, just like stock 2, its expected return must also be 7.1%, or 0.071.

Attempt 3/99 for 10 pts.

Part 2

What is the risk-free rate?