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%,

Question 1

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

Question 1 options:

	Return on market = 12%, Return on zero-beta stock = 0%
	Return on market = 12%, Return on zero-beta stock = 2%
	Return on market = 10%, Return on zero-beta stock = 0%
	Return on market = 10%, Return on zero-beta stock = 2%

Question 2

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?

Question 2 options:

	CAPM return = 10.50%, actual return = 10.98%
	CAPM return = 10.50%, actual return = 15.85%
	CAPM return = 12.20%, actual return = 10.98%
	CAPM return = 12.20%, actual return = 15.85%

Question 3

Is the stock overpriced or underpriced?

Question 3 options:

	Underpriced since actual return is larger than CAPM return
	Overpriced since actual return is larger than CAPM return
	Underpriced since actual return is smaller than CAPM return
	Overpriced since actual return is larger than CAPM return