Suppose you consider buying a share of stock at a price of $75. The stock is expected to pay a dividend of $9 next year and to sell then for $78. 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.

Fair rate return

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

Expected rate of return

Is the stock over priced or underpriced?