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 6%. Suppose also that the expected return required by the market for a portfolio with a beta of 1 is 14.0%. According to the capital asset pricing model a. What is the expected return on the market portfolio? (Round your answer to 1 decimal place.) 14.0 Expected rate of return b. What would be the expected return on a zero-beta stock? Expected rate of return 6 Suppose you consider buying a share of stock at a price of $45. The stock is expected to pay a dividend c-1. Using the SML, calculate the fair rate of return for a stock with a B -0.5 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

Explanation / Answer

C-1

Using SML,

Fair rate of return = risk free rate + (Market rate - Risk free rate)*beta

Fair rate of return = 6 + (14-6)*-0.5

Fair rate of return = 2%

c-2

Using Expected Price & dividend

Expected rate of return =(Expected Dividend+(Expected Price - Current Price)/CurrentPrice

Expected rate of return = (4 + (47-45))/45

Expected rate of return = 13.33%

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