You are researching stock investments. The yield on short-term government securities (perceived to be risk-free) is about 4%. The expected return required by the market for a portfolio with a beta of 1 is 9.0%. According to the capital asset pricing model:

a. What is the expected return on the market portfolio? (Round your answer to 1 decimal place.)

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

Suppose you consider buying a share of stock at a price of $35. Based on your research, the stock is expected to pay a dividend of $8 next year and to sell then for $37. The stock risk has been evaluated at = 0.5. c-1. Using the SML (the expected return-beta relationship of the CAPM), calculate the fair (i.e., CAPM) 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 (Note: relative to the CAPM fair rate of return)?

multiple choice

• Underpriced

• Overpriced