Question $1$

Assume the risk$-$free rate is $4\%$ per year, the expected return on the Market Portfolio is $8\%$ per year and

the standard deviation of the return on the Market Portfolio is $20\%$ per year. A share of ABC stock is

now selling for $$50.$ ABC stock will pay a dividend of $$2\mathrm{.}50$ per share at the end of the year. The beta of

ABC stock is $1\mathrm{.}20.$

a$)$ Under the assumptions of the CAPM, what do investors expect the stock to sell for at the end of the

year?

b$)$ While investors in general expect the stock to sell for what you found above, you disagree from the

consensus and expect that ABC stock will sell for $$53\mathrm{.}40$ at the end of the year. From your perspective,

what is the alpha of ABC stock?