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Suppose the rate of return on short-term government securities (perceived to be risk-free) is about 7%. 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 7%. Suppose also that the expected rate of return required by the market for a portfolio with a beta of 1 is 15%. Capital asset pricing model holds. Suppose you consider buying a share of stock at $56. The stock is expected to pay $2 dividends next year and you expect it to sell then for $59. The stock risk has been evaluated at = .5. Is the stock overpriced or underpriced? (Show detailed calculation to support your conclusion.)
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