Suppose the yield on short-term government securities (perceived to be risk-free) is about 4%. Suppose also that the expected return required by the market for a portfolio with a beta of 1 is 12%. According to the capital asset pricing model: (Leave no cells blank - be certain to enter "0" wherever required.)

a. What is the expected return on the market portfolio?

b. What would be the expected return on a zero-beta stock?

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 = 0.5.

c-1. Using the SML, calculate the fair rate of return for a stock with a = 0.5.

c-2. Calculate the expected rate of return, using the expected price and dividend for next year.

c-3. Is the stock overpriced or underpriced?

• Underpriced

• Overpriced