Suppose you consider buying a share of Stock J at a price of $$41.$ The stock is expected to pay a dividend of $$5$ next year and its price is expected to be $$39$ next year.

$($a$)$ Calculate the expected returns of Stock J in this year. $(2$ marks$)$

According to the data on Yahoo Finance, the yield on short$-$term government securities is $3\%$ and the expected return of market portfolio is $10\%.$ The beta of stock J is $0\mathrm{.}85.$

$($b$)$ According to the CAPM, what is the fair returns of Stock J$?(2$ marks$)$

$($c$)$ Compare the returns found in $($a$)$ and $($b$),$ is Stock J currently overpriced or underpriced? $(2$ marks$)$

$($d$)$ Draw the security market line $($SML$)$ on a well$-$labelled diagram and plot Stock J$.$ Is Stock J above or below the SML$?$

$(4$ marks$)$

$1$