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Problem 7-25 (Static) Suppose the yield on short-term government securities (perceived to be risk-free) is about 4%. Suppose also that the expected return required
Problem 7-25 (Static) Suppose the yield on short-term government securities (perceived to be risk-free) is about 4%. Suppose also that the expected return required by the market for a portfolio with a beta of 1 is 12%. According to the capital asset pricing model: (Leave no cells blank - be certain to enter "O" wherever required.) Required: a. What is the expected return on the market portfolio? 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 $40. The stock is expected to pay a dividend of $3 next year and to sell then for $41. The stock risk has been evaluated at = -0.5. Suppose you consider buying a share of stock at a price of $40. The stock is expected to pay a dividend of $3 next year and to sell then for $41. 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. Fair rate of return % c-2. Calculate the expected rate of return, using the expected price and dividend for next year. Expected rate of return % c-3. Is the stock overpriced or underpriced? Overpriced O Underpriced
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