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:

a. What is the expected return on the market portfolio? (Enter your answer as a percentage rounded to 1 decimal places.)

  Expected rate of return % ?

b. What would be the expected return on a zero-beta stock? (Enter your answer as a percentage rounded to 1 decimal places.)

  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 $11 next year and to sell then for $88. The stock risk has been evaluated at β = 0.5.

c-1. Using the SML, calculate the fair rate of return for a stock with a β = 0.5. (Negative value should be indicated by a minus sign. Enter your answer as a percentage rounded to 2 decimal places.)

  Fair rate of return % ?

c-2. Calculate your expected rate of return for the stock with a β = 0.5, using the expected price and dividend for next year. (Enter your answer as a percentage rounded to 2 decimal places.)

  Expected rate of return % ?

c-3. Is the stock overpriced or underpriced?

Underpriced?

Overpriced?