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Problem 7.3 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
Problem 7.3 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 10.0%. According to the capital asset pricing model: a. What is the expected return on the market portfolio? (Enter your answer in percentage points. Round your answer to the nearest whole percent.) b. What would be the expected return on a zero-beta stock? (Enter your answer in percentage points. Round your answer to the nearest whole percent.) Suppose you consider buying a share of stock at a price of $75. The stock is expected to pay a dividend of $9 next year and to sell then for $78. 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. (Enter your answer in percentage points. Round your answer to the nearest whole percent.) c-2. Calculate the expected rate of return, using the expected price and dividend for next year. (Enter your answer in percentage points. Round your answer to the nearest whole percent.) Expected rate of return c-3. Is the stock overpriced or underpriced
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