The yield on T$-$bills is $4\mathrm{.}5\%$ and the risk premium on a portfolio with beta$=1$ is $8\%.$ According to

the capital asset pricing model:

a$)$ What would be the expected return on a zero$-$beta stock? $(3$ points$)$

b$)$ You purchased a stock at a price of $$28.$ The stock is expected to pay a dividend of $$1\mathrm{.}50$ next

year and you forecast that you can sell the security for to sell then for $$30.$ The stock risk has been

evaluated at $=0\mathrm{.}70.$

i$.$ Using the SML$,$ calculate the expected rate of return for the stock. $(3$ points$)$

ii$.$ Calculate the expected rate of return, using the expected price and dividend for next year. $(3$

points$)$

iii. Is the stock overpriced or underpriced? By how much? $(3$ points$)$