Suppose the rate of return on short-term government securities (perceived to be risk-free) is about 7%. Suppose also that the expected rate of return required by the market for a portfolio with a beta...

Suppose the rate of return on short-term government securities (perceived to be risk-free) is about 7%. Suppose also that the expected rate of return required by the market for a portfolio with a beta of 1 is 13%. According to the capital asset pricing model:

a.What is the expected rate of return on the market portfolio?(Round your answer to 2 decimal places.)

b.What would be the expected rate of return on a stock with β = 0?(Round your answer to 2 decimal places.)

c.Suppose you consider buying a share of stock at $47. The stock is expected to pay $3.5 dividends next year and you expect it to sell then for $49. The stock risk has been evaluated at β = –.5. Is the stock overpriced or underpriced?

A. Underpriced

B. Overpriced