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problem: A share of stock with a beta of 0.75 now sells for 50 dollar. Investors expect the stock to pay a year-end dividend of 2 dollar. The Treasury bill rate is 4%, and the market risk premium is 7%. The stock is perceived to be fairly priced today. Assume investors actually believe the stock will sell for dollar 54 at year-end. Is the stock a good or bad purchase? Find what will investors do? At what point will the stock reach an ‘equilibrium’ at which it again is perceived as fairly priced?

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