10. The Capital Asset Pricing Model and the security market line Keith holds a portfolio that is invested equally in three stocks (WD = WA = W₁ = 1/3). Each stock is described in the following table: Stock Beta Standard Deviation DET 0.7 AIL 1.0 INO 1.6 RATE OF RETURN (Percent) An analyst has used market- and firm-specific information to make expected return estimates for each stock. The analyst's expected return estimates. may or may not equal the stocks' required returns. 20 The risk-free rate [TRF] is 6%, and the market risk premium [RPM] is 4%. Use the following graph with the security market line (SML) to plot each stock's beta and expected return. (Note: Click on the points on the graph to see their coordinates.) 18 16 14 12 10 2 0 25% 38% 34% 0 Expected Return 0.2 0.4 0.6 8.0% 10.0% 13.5% 0.8 1.0 1.2 1.4 1.6 1.8 RISK (Beta) 2.0 0 Stock DET Stock AIL Stock INO A stock is in equilibrium if its required return its expected return. In general, assume that markets and stocks are in equilibrium (or fairly valued), but sometimes investors have different opinions about a stock's prospects and may think that a stock is out of equilibrium (either undervalued or overvalued). Based on the analyst's expected return estimates, stock INO is , stock AIL is in equilibrium, and stock DET is
10. The Capital Asset Pricing Model and the security market line Keith holds a portfolio that is invested equally in three stocks (WD = WA = W₁ = 1/3). Each stock is described in the following table: Stock Beta Standard Deviation DET 0.7 AIL 1.0 INO 1.6 RATE OF RETURN (Percent) An analyst has used market- and firm-specific information to make expected return estimates for each stock. The analyst's expected return estimates. may or may not equal the stocks' required returns. 20 The risk-free rate [TRF] is 6%, and the market risk premium [RPM] is 4%. Use the following graph with the security market line (SML) to plot each stock's beta and expected return. (Note: Click on the points on the graph to see their coordinates.) 18 16 14 12 10 2 0 25% 38% 34% 0 Expected Return 0.2 0.4 0.6 8.0% 10.0% 13.5% 0.8 1.0 1.2 1.4 1.6 1.8 RISK (Beta) 2.0 0 Stock DET Stock AIL Stock INO A stock is in equilibrium if its required return its expected return. In general, assume that markets and stocks are in equilibrium (or fairly valued), but sometimes investors have different opinions about a stock's prospects and may think that a stock is out of equilibrium (either undervalued or overvalued). Based on the analyst's expected return estimates, stock INO is , stock AIL is in equilibrium, and stock DET is
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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![10. The Capital Asset Pricing Model and the security market line
Keith holds a portfolio that is invested equally in three stocks (WD = WA = W₁ = 1/3). Each stock is described in the following table:
Stock
DET
RATE OF RETURN (Percent)
AIL
INO
20
18
16
14
An analyst has used market- and firm-specific information to make expected return estimates for each stock. The analyst's expected return estimates
may or may not equal the stocks' required returns.
12
0
The risk-free rate [TRF] is 6%, and the market risk premium [RPM] is 4%. Use the following graph with the security market line (SML) to plot each
stock's beta and expected return. (Note: Click on the points on the graph to see their coordinates.)
2
Beta Standard Deviation
0.7
1.0
1.6
0
25%
38%
34%
0.2 0.4 0.6
Expected Return
8.0%
10.0%
0.8 1.0 1.2
RISK (Beta)
13.5%
1.4 1.6 1.8
2.0
Stock DET
Stock AIL
Stock INO
A stock is in equilibrium if its required return
its expected return. In general, assume that markets and stocks are in equilibrium
(or fairly valued), but sometimes investors have different opinions about a stock's prospects and may think that a stock is out of equilibrium (either
undervalued or overvalued). Based on the analyst's expected return estimates, stock INO is
stock AIL is in equilibrium, and
stock DET is](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F9979fba9-275a-461e-97a1-410682ecb785%2F87656b7d-d08c-415e-854c-157efb2e8fac%2F3z3x23h_processed.png&w=3840&q=75)
Transcribed Image Text:10. The Capital Asset Pricing Model and the security market line
Keith holds a portfolio that is invested equally in three stocks (WD = WA = W₁ = 1/3). Each stock is described in the following table:
Stock
DET
RATE OF RETURN (Percent)
AIL
INO
20
18
16
14
An analyst has used market- and firm-specific information to make expected return estimates for each stock. The analyst's expected return estimates
may or may not equal the stocks' required returns.
12
0
The risk-free rate [TRF] is 6%, and the market risk premium [RPM] is 4%. Use the following graph with the security market line (SML) to plot each
stock's beta and expected return. (Note: Click on the points on the graph to see their coordinates.)
2
Beta Standard Deviation
0.7
1.0
1.6
0
25%
38%
34%
0.2 0.4 0.6
Expected Return
8.0%
10.0%
0.8 1.0 1.2
RISK (Beta)
13.5%
1.4 1.6 1.8
2.0
Stock DET
Stock AIL
Stock INO
A stock is in equilibrium if its required return
its expected return. In general, assume that markets and stocks are in equilibrium
(or fairly valued), but sometimes investors have different opinions about a stock's prospects and may think that a stock is out of equilibrium (either
undervalued or overvalued). Based on the analyst's expected return estimates, stock INO is
stock AIL is in equilibrium, and
stock DET is
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