Suppose the rate of return on short-term government securities (perceived to be risk-free) is about 8%. Suppose also that the expected rate of return required by the market for a portfolio with a beta of 1 is 12%. 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.)

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

c. Suppose you consider buying a share of stock at $41. The stock is expected to pay $2 dividends next year and you expect it to sell then for $43. The stock risk has been evaluated at = .5. Is the stock overpriced or underpriced?

• Overpriced

• Underpriced