Solutions to Chapter 1

Based on the historical risk premium of the S&P 500 (7.7 percent) and the current level of the risk-free rate (about 1.8 percent), one would predict an expected rate of return of 9.5 percent. If the stock has the same systematic risk, it also should provide this expected return. Therefore, the stock price equals the present value of cash flows for a one-year horizon. ................
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