uppose 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 is 16.0%. According to the capital asset pricing model:

a.What is the expected return on the market portfolio?

b. What would be the expected return on a zero-beta stock?

c. Suppose you consider buying a share of stock at a price of $65. The stock is expected to pay a dividend of $8 next year and to sell then for $68. The stock risk has been evaluated at = -0.5.

c-1.Using the SML, calculate the fair rate of return for a stock with a = -0.5.(Round your answer to 1 decimal place.)

c-2.Calculate the expected rate of return, using the expected price and dividend for next year.(Round your answer to 2 decimal places.)

c-3.Is the stock overpriced or underpriced?

• Underpriced
• Overpriced