Question
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
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 14%. 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 $50. The stock is expected to pay $3 dividends next year and you expect it to sell then for $53. The stock risk has been evaluated at = .5. Is the stock overpriced or underpriced? | ||
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