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 12 0% According to the capital asset pricing model What is the expected return on the market portfolio'? (Round your answer to 1 decimal place.) Expected rate of return % What would be the expected return on a zero beta stock? Expected rate of return [% Suppose you consider buying a share of stock at a price of $85 The stock is expected to pay a dividend of St t next year and to then tor S88 The stock risk has been evaluated at Using the SMI. calculate the tan rate of return for a stock with a p = -0 5 Fait rate of return % c-2. Calculate the expected rate of return, using the expected and dividend for next year (Round your answer to 2 decimal places.)

Explanation / Answer

A. Capm = ke = Rf + beta(rm - rf), rm = market return, Rf = ri3 free interest , ke = required return

Putting the above value,

12% = 6% + 1(rm - 6%)

6 % = rm - 6%

Rm = 12%

B. Zero beta,

Ke = 6% + 0 (12- 6)

= 6%

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