Question

Check my wa 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 11.0%. According to the capital asset pricing model: o. What is the expected return on the market portfolio? (Round your answer to 1 decimal place.) Expected rate of return b. What would be the expected return on a zero-beta stock? Expected rate of return

Answer 1

Expected rate of return = 11%

* When the stock has beta equal to one the market return and stock return are same

Expected rate of return = 4%

* When the stock has beta equal to zero the expected return is same as risk free rate

required rate of return= Rf + (Beta * (Rm - Rf))

Required rate of return = 4% +(0.5 * (11% - 4%))

Fair rate of return = 7.5%

Using DDM

R = (D1/P0) + ( g )

R = (10/110) + ( 2.73% )

Expected rate of return = 11.82%

g = (113-110)/110 = 2.73%