Suppose the yield on short-term government securities (perceived to be risk-free) is about 2% and the expected return required by the market for a portfolio with a beta of 1 is 12%,

a.) According to the capital asset pricing model, what are the expected returns on the market portfolio and a zero-beta stock?

b.) Suppose you consider buying a share of stock at a price of $41. The stock is expected to pay a dividend of $2.5 next year and to sell them for $45. The stock risk has to be evaluated at beta = 0.85. What are the CAPM return and actual return on this stock?

c.) Is the stock overpriced or underpriced?