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 7.76%. Suppose also that the expected return required by the market for a portfolio with a beta of 1.0 is 17.76%. According to the capital asset pricing model:

What is the expected return on the market portfolio? (Round your answer to 2 decimal places.

What would be the expected return on a zero-beta stock? (Round your answer to 2 decimal places. Omit the "%" sign in your response.)

Suppose you consider buying a share of stock at a price of $35. The stock is expected to pay a dividend of $7 next year and to sell then for $53. The stock risk has been evaluated at ? = -0.5. Is the stock overpriced or underpriced?

Suppose the yield on short-term government securities (perceived to be risk-free) is about 7.76%. Suppose also that the expected return required by the market for a portfolio with a beta of 1.0 is 17.76%. According to the capital asset pricing model:

Explanation / Answer

a) Rate of return = rf+ beta*(rm-rf)

Rate of return = 7.76% + 1*(17.76%-7.76%) = 17.76%

b) Rate of return= 7.76% + 0*(17.76%-7.76%) = 7.76%

c) rate of return of stock = 7.76% + (-0.5)*(17.76%-7.76%) = 2.76%

Price of stock = 7/(1+2.76%) + 53//1+2.76%) =$58.39

current sahre price = $35<$58.39

the stock is underpriced

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