According to CAPM: What is the expected return on the market portfolio?
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Suppose the yield on short-term government securities (perceived to be risk-free) is about 4%. Suppose also that the expected return required by the market for a portfolio with a beta of 1.0 is 12%. 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?
c. Suppose you consider buying a share of stock at a price of $40. The stock is expected to pay a dividend of $3 next year and to sell then for $41. The stock risk has been evaluated at β=-0.5. Is the stock overpriced or underpriced?
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a. What is the expected return on the market portfolio?
The market has a beta of 1.0, so expected return on it is same as the expected return on a portfolio with beta 1.0. Thus the answer is 12%.
b. What would be the expected return on a zero-beta ...
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