Suppose the yield on short-term government securities (perceived to be risk-free

Question

Suppose the yield on short-term government securities (perceived to be risk-free) is about 4% Suppose also that the expected return required by the market for a portfolio with a beta of 1 is 140W According to the capital asset pricing model: a. What is the expected return on the market portfolio? (Round your answer to I decimal place.) Expected rate of return 14 % b. What would be the expected return on a zero-beta stock? Expected rate of return 4 % Suppose you consider buying a share of stock at a price of $30 The stock is expected to pay a dividend of $4 next year and to sell then for $31 The stock risk has been evaluated at beta = -.5. c-1. Using the SML. calculate the fair rate of return for a stock with a beta = -0.5. (Negative value should be indicated by a minus sign. Round your answer to 2 decimal places.) Fair rate of return % c-2. Calculate the expected rate of return, using the expected price and dividend for next year (Round your answer to 2 decimal places.) Expected rate of return % c-3. Is the stock overpriced or underpriced? Underpriced Overpriced

Explanation / Answer

A

14%

B

4%

C1

Fair return = 4% + (-0.5)*(14% - 4%) = -1%

C2

Let the return be

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