Question

Suppose the yield on short-term government securities (perceived to be risk-free) is about 5%. 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: a. What is the expected return on the market portfolio? b. What would be the expected return on a zero-beta stock? Suppose you consider buying a share of stock at a price of $80. The stock is expected to pay a dividend of $10 next year and to sell then for $83. 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. c-2. Calculate the expected rate of return, using the expected price and dividend for next year. c-3. Is the stock overpriced or underpriced?

Answer 1

ANSHER Expected return = risk fore gote + beta x { market retuon - ISK free, vate} @ Expected reteron : yg 4. + 1% (116.-5) : 5+1X(6%) (6) Expected retuon - 5% +0 x (11.7. -5%) 5, (C) Expected return = 51. +(-0.5) x (11% -5%). - 2% Actual retuon = 01/p0 + (P1-PO)/PO - 0 + (83-80970 0.1625 = 16.25% :. The stock is underpriced as the retuon per CAPM is less compared to retuon as per dividend growth model. * * - "Thanking YOU PLEASE GIVE LIKE FOR SUPPORT – 40