Suppose you consider buying a share of stock at a price of $55. The stock is expected to pay a dividend of $6 next year and to sell then for $57. The stock risk has been evaluated at β = –0.5. c-1. Using the SML, calculate the fair rate of return for a stock with a β = –0.5.

12.7%

Explanation:

Fair market return=*$7/55=7/55=12.7%

dividend=$6

Gain on stock price=$57-$55=$2

*Total return=$6+$2=$7

Stock base price=$55

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