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Top hedge fund manager Sally Buffit believes that a stock with the same market risk as the S&P 500 will sell at year-end at a

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Top hedge fund manager Sally Buffit believes that a stock with the same market risk as the S&P 500 will sell at year-end at a price of $60. The stock will pay a dividend at year-end of $2.00. Assume that risk-free Treasury securities currently offer an interest rate of 1.5%.

Average rates of return on Treasury bills, government bonds, and common stocks, 1900-2015 (figures in percent per year) are as follows.

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Average Premium (Extra return Average Annual versus Treasury Portfolio Rate of Return ($) bills) ($) Treasury bills 3. B Treasury bonds 5.3 1 .5 Common stocks 11 . 4 7.6

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