Suppose the yield on short-term government securities, Ask an Expert

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Suppose the yield on short-term government securities (perceived to be risk-free) is about 4%. Suppose also that the expected return required by the market for a portfolio with a beta of 1 is 12%. According to the capital asset pricing model:

a. What is the expected return on the market portfolio?

b. What would be the expected return on a zero-beta stock?

c. Suppose you consider buying a share of stock at a price of $40. The stock is expected to pay a dividend of $3 next year and to sell then for $41. The stock risk has been evaluated at beta =-.5. Is the stock overpriced or underpriced?What is it's alpha?

DO NOT FORGET TO INCLUDE THE FORMULAS ALSO

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Financial Management, Finance

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