Problem 9-21

Suppose the rate of return on short-term government securities (perceived to be risk-free) is about 6%. Suppose also that the expected rate of return required by the market for a portfolio with a beta of 1 is 13%. According to the capital asset pricing model:

a.	What is the expected rate of return on the market portfolio? (Round your answer to 2 decimal places. Omit the "%" sign in your response.)

Expected rate of return

%

b.	What would be the expected rate of return on a stock with = 0? (Round your answer to 2 decimal places. Omit the "%" sign in your response.)

Expected rate of return

%

c.

Suppose you consider buying a share of stock at $46. The stock is expected to pay $2 dividends next year and you expect it to sell then for $48. The stock risk has been evaluated at = .5. Is the stock overpriced or underpriced?

	Underpriced
	Overpriced