Suppose the yield on short-term government securities (perceived to be risk-free) is about 6%. Suppose also that the expected return required by the market for a portfolio with a beta of 1.0 is 13.0%.

c. Suppose you consider buying a share of stock at a price of $105. The stock is expected to pay a dividend of $9 next year and to sell then for $108. The stock risk has been evaluated at = 0.5. Using the SML, calculate the fair rate of return for a stock with a = 0.5.

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