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Suppose the rate of return on short-term government securities (perceived to be risk-free) is 5%. Suppose also that the expected rate of return required by the market for a portfolio with a beta of 1 is 12%. According to the CAPM:

a. What is the expected rate of return on the market portfolio?
b. What would be the expected rate of return on a stock with β = 0?

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Elin Hessel
Elin HesselLv2
29 Sep 2019

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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 portfolio with a beta of 1 is 12%. According to the capital asset pricing model:

  1. What is the expected rate of return on the market portfolio?
  2. What would be the expected rate of return on a stock with beta = 0?
  3. 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 the stock overpriced or underpriced?

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 portfolio 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 portfolio?

b. What would be the expected rate of return on a stock with beta=0?

c. Suppose you consider buying a share of stock at $40. The stock is expected to pay a $3 dividend next year and you expect it to then sell for $41. The stock risk has been evaluated at beta=-.5. Is the stock overpriced or underpriced?

A stock has a beta of 0.6 and an expected return of 14%. The risk free rate is 3% and the expected return on the market portfolio is 12%. How much better (or worse) is the expected return on the stock compared to what it should be according to the CAPM?

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