Question
Problem 7-25 Suppose the yield on short-term government securities (perceived to be risk-free) is about 5%. Suppose also that the expected return required by the
Problem 7-25
Suppose the yield on short-term government securities (perceived to be risk-free) is about 5%. Suppose also that the expected return required by the market for a portfolio with a beta of 1 is 8.0%. According to the capital asset pricing model: |
a. | What is the expected return on the market portfolio?(Round your answer to 1 decimal place.) |
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 $100. The stock is expected to pay a dividend of $9 next year and to sell then for $103. The stock risk has been evaluated at = .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.(Round your answer to 2 decimal places.) |
Expected rate of return | % |
c-3. | Is the stock overpriced or underpriced? | ||
|
Step by Step Solution
There are 3 Steps involved in it
Step: 1
![blur-text-image](https://dsd5zvtm8ll6.cloudfront.net/includes/images/document_product_info/blur-text-image.webp)
Get Instant Access with AI-Powered Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
![blur-text-image](https://dsd5zvtm8ll6.cloudfront.net/includes/images/document_product_info/blur-subtext-image.webp)
Step: 3
![blur-text-image](https://dsd5zvtm8ll6.cloudfront.net/includes/images/document_product_info/blur-subtext-image.webp)
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started