Question
Consider a stock with =0.75. The market portfolio has an expected return of 11% over the next year. The risk free rate over the next
Consider a stock with =0.75. The market portfolio has an expected return of 11% over the next
year. The risk free rate over the next year is 4%. The stock will pay a dividend of $2 at the end of
the year, and you believe its price will be $52 at the end of the year.
a) According to CAPM, what should the return on this stock be over the next year?
b) According to CAPM, what should the price of this stock be today?
c) The stock trades at $48 today. According to CAPM, should you buy it or not?
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South Western Federal Taxation 2016 Corporations Partnerships Estates And Trusts
Authors: James Boyd, William Hoffman, Raabe, David Maloney, Young
39th Edition
978-1305399884
