Suppose the rate of return on short-term government securities (perceived to be risk- free) is about 5%. Suppose also that the expected rate of return required by the market for a portfolio with a beta of 1 is 12%.

(a) According to the capital asset pricing model: What is the expected rate of return on the market portfolio? What would be the expected rate of return on a stock with = 0?

(b) Suppose you consider buying a share of stock at $20. The stock is expected to pay $1 dividend next year and you expect to sell it for $23. The stock has been estimated with = 1.2. What is the CAPM alpha of this stock?