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Q2. Suppose the rate of return on short-term government securities (perceived to be riskfree) is about 4%. Suppose also that the expected rate of return
Q2. Suppose the rate of return on short-term government securities (perceived to be riskfree) is about 4%. Suppose also that the expected rate of return required by the market for a portfolio with a beta of 1 is 14%. According to the capital asset pricing model: (a) What is the expected rate of return on the market portfolio? (b) What would be the expected rate of return on a stock with =0 ? (c) Suppose you consider buying a share of stock at $40. The stock is expected to pay $4 dividends next year and you expect to sell then for $42. The stock risk has been evaluated at =0.5. Is the stock overpriced or underpriced
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