Question #6: CAPM [19 Points] Use the Figure below to answer Parts (a)-(c) ET) SML...
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Question #6: CAPM [19 Points] Use the Figure below to answer Parts (a)-(c) ET) SML 0.0882----- 0.075L--- 0.031 1 13 Beta (B) (a) What is the expected return of the market portfolio? No explanation is required. (2 Points) (b) What is the risk-free rate (r.)? No explanation is required. (2 Points] (c) What is the expected return of an asset with a beta of 1.3? [Points) Use the following scenario to answer Part (d) Suppose that the current price for a share of Six Flags (SIX) stock is at $35.96. The stock is expected to pay $3.32 in dividends next year and you anticipate that you will be able to sell the stock for $37 next year. Assume that E(TM) = 0.10, the risk-free rate (11) = 0.042 and SIX has a beta (B) = 0.93. (d) IS SIX stock overpriced or underpriced at its current price. You must justify your answer. (Hint: Find the required rate of return of SIX stock and then compare it to the 1 Year HPR of SIX stock) (10 Points]
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