Can you tell which investor was a better selector of individual stocks (aside from the issue of general movements in the market)? b. If the T-bill rate were 6% and the market return during the period were 14%, which investor would be the superior stock selector? c. What if the T-bill rate were 3% and the market return were 15%? 17. In 1999 the rate of return on short-term government securities (perceived to be risk- free) was about 5%. Suppose the expected rate of return required by the market for a portfolio with a beta of 1 is 12%. According to the capital asset pricing model (security market line): a. What is the expected rate of return on the market portfolio? b. What would be the expected rate of return on a stock with 0? c. Suppose you consider buying a share of stock at $40. The stock is expected to pay $3 dividends next year and you expect it to sell then for $41. The stock risk has been evaluated at .5. Is the stock overpriced or underpriced? 18. Suppose that you can invest risk-free at rate rf but can borrow only at a higher rate, rf . This case was considered in Section 8.6. a. Draw a minimum-variance frontier. Show on the graph the risky portfolio that will be selected by defensive investors. Show the portfolio that will be selected by ag- gressive investors. b. What portfolios will be selected by investors who neither borrow nor lend? c. Where will the market portfolio lie on the efficient frontier? d. Will the zero-beta CAPM be valid in this scenario? Explain. Show graphically the expected return on the zero-beta portfolio. 19. Consider an economy with two classes of investors. Tax-exempt investors can borrow or lend at the safe rate, rf. Taxed investors pay tax rate t on all interest income, so their III. Equilibrium In Capital Markets 9. The Capital Asset Pricing Model The McGraw−Hill Companies, 2001           CHAPTER 9 The Capital Asset Pricing Model 289