Question

1.Assume that CAPM is valid. A share of stock is now selling for $85. It will pay a dividend of $7 per share at the end of the year. Its beta is 1. What do investors expect the stock to sell for at the end of the year? Assume the risk-free rate is 7% and the expected rate of return on the market portfolio is 17%. (Round your answer to 2 decimal places.)

2.Suppose two factors are identified for the U.S. economy: the growth rate of industrial production, IP, and the inflation rate, IR. IP is expected to be 3% and IR 7%. A stock with a beta of 1 on IP and 0.4 on IR currently is expected to provide a rate of return of 12%. If industrial production actually grows by 4%, while the inflation rate turns out to be 8%, what will be your expected rate of return on the stock, given the new information about the industrial production rate and the inflation rate? (Enter your answer as a percentage rounded to 1 decimal places.)

Expected rate of return

%

Answer 1