Question: 3. Answer the following questions: a. Given that the expected return on a portfolio with a beta of 1 is 12%. The risk free rate

3. Answer the following questions: a. Given that the expected return on a portfolio with a beta of 1 is 12%. The risk free rate is 5%. According to the CAPM: i. What is the expected rate of return on the market portfolio? [3 marks] ii. What would be the expected rate of return on a stock with a beta of 0? [3 marks) iii. 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 beta = - 0.5. Is this stock overpriced or underpriced? [10 marks] b. Based on the portfolio below, Sophie would expect a higher return on Portfolio A than Portfolio B under CAPM. Assuming both portfolios are fully diversified, explain whether Sophie is correct in thinking that. Portfolio A Portfolio B Systematic Risk 1.0 1.0 Unsystematic Risk High Low [9 marks] [Total 25 marks]

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