Question

1) A stock with a beta of 1.5 has an expected rate of return of 20%. If the market return this year turns out to

be 11 percentage points below expectations, what is your best guess as to the rate of return on the stock? (Do not round intermediate calculations. Enter your answer as a percent rounded to 1 decimal place.)

2) A share of stock with a beta of 0.78 now sells for $53. Investors expect the stock to pay a year-end dividend of $5. The T-bill rate is 5%, and the market risk premium is 8%. If the stock is perceived to be fairly priced today, what must be investors’ expectation of the price of the stock at the end of the year? (Do not round intermediate calculations. Round your answer to 3 decimal places.)

3) The risk-free rate is 6% and the expected rate of return on the market portfolio is 13%.

a. Calculate the required rate of return on a security with a beta of 1.34. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

b. If the security is expected to return 17%, is it overpriced or underpriced?

4) A share of stock with a beta of 0.76 now sells for $51. Investors expect the stock to pay a year-end dividend of $2. The T-bill rate is 3%, and the market risk premium is 7%.

a. Suppose investors believe the stock will sell for $53 at year-end. Is the stock a good or bad buy? What will investors do?

b. At what price will the stock reach an “equilibrium” at which it is perceived as fairly priced today? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

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