Market price of security
$
40.00
Security expected rate of return
13.0%
Risk free rate of return
7.0%
Market risk premium
8.0%
Change in beta (x)
2
Solution
Current security beta
0.75
New security beta
1.50
Current dividend
$
5.20
New expected rate of return on security
19.0%
New price of security
$
27.37
The market price of a security is $40. Its expected rate o
return is 13%. The risk-free rate is 7%, and the market r
premium is 8%. What will the market price of the securi
its beta doubles (and all other variables remain unchan
Assume the stock is expected to pay a constant dividen
perpetuity.

of
risk
ity be if
nged)?

Assume the risk-free rate is 8% and the expected rate
return on the market is 18%. A share of stock is now s
for $100. It will pay a dividend of $9 per share at the en
the year. Its beta is 1. What do investors expect the st
sell for at the end of the year?

e of
selling
nd of
tock to

Investment Return
Beta
ST govt
4.0%
Market
12.0%
1.00
Start stock price
$
40.00
End stock price
$
41.00
Dividend
$
3.00
Stock beta
-0.50
Solution
Suppose the yield on short-term government securitie
to be risk-free) is about 4%. Suppose also that the exp
required by the market for a portfolio with a beta of 1
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 s
c. Suppose you consider buying a share of stock at a
The stock is expected to pay a dividend of $3 next yea
then for $41. The stock risk has been evaluated at bet
stock overpriced or underpriced?

ies (perceived
pected return
is 12%.
o?
stock?
a price of $40.
ear and to sell
ta = -0.5. Is the