Suppose the rate of return on short-term government securities (perceived to be risk-free) is about 5%. Suppose

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Suppose the rate of return on short-term government securities (perceived to be risk-free) is about 5%. Suppose also that the expected rate of return required by the market for a with a beta of 1 is 12%. According to the capital asset pricing model:
a. What is the expected rate of return on the market What would be the expected rate of return on a stock with β = 0?
c. Suppose you consider buying a share of stock at $40. The stock is expected to pay $3 dividends next year and you expect it to sell then for $41. The stock risk has been evaluated at β = -.5. Is the stock overpriced or underpriced?

Portfolio
A portfolio is a grouping of financial assets such as stocks, bonds, commodities, currencies and cash equivalents, as well as their fund counterparts, including mutual, exchange-traded and closed funds. A portfolio can also consist of non-publicly...

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a Since the market portfolio by definition has a beta of 1 its expected rate of return is 12 b 0 ...View the full answer

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