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 5%. Suppose also that the expected return required by the market for a portfolio with a beta of 1 is 15.0%. According to the capital asset pricing model: What is the expected return on the market portfolio? (Round your answer to 1 decimal place.) What would be the expected return on a zero-beta stock? Suppose you consider buying a share of stock at a price of $60. The stock is expected to pay a dividend of $7 next year and to sell then for $63. The stock risk has been evaluated at (3 = -.5. Using the SML, calculate the fair rate of return for a stock with a (3 = -0.5. Calculate the expected rate of return, using the expected price and dividend for next year. (Round your answer to 2 decimal places.)

Explanation / Answer

Ans-

Risk free(Rf)=5%

Expected return on market (Rm)=15%

Beta ()=1

a)expected return on market portpolio=Rf+(Rm-Rf)

                                                      =0.05+1(0.15-0.05)

                                                      =15%

b)expected return on zero beta stock =Rf+(Rm-Rf)

                                                       =0.05+0(0.15-0.05)

                                                       =5%

C-1)fair rate of return =Rf+(Rm-Rf)

                                   =0.05-0.5(0.15-.05)

                              =0

c-2)Expected rate of return =(dividend +price change/begining price)*100

                             =(7+3/60)*100

                            =16.67%

                                        =11.11%

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