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Suppose the yield on short-term government securities (perceived to be risk-free) is about 1%. Suppose also that the expected return required by the market for
Suppose the yield on short-term government securities (perceived to be risk-free) is about 1%. Suppose also that the expected return required by the market for a portfolio with a beta of 1 is 15%. Suppose you consider buying a share of stock at a price of $40. The stock is expected to pay a dividend of $3 next year and to sell then for $41. The stock risk has been evaluated at ? = .5. According to the Capital Asset Pricing Model, is the stock overpriced or underpriced?
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