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Suppose the vield on short-term government securities (perceived to be risk-free) is about 6%. Suppose also that the expectedSuppose you consider buying a share of stock at a price of $105. The stock is expected to pay a dividend of $9 next year and

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Answer #1

Fair rate of return = Risk free rate + beta*(Market return – risk free rate)

= 6% - 0.5*(13%-6%)

= 2.5%

Expected rate of return = (Dividend in Year 1 + Price in Year 1- Price today)/Price today

= (9+108-105)/105

= 11.43%

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