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A stock is in equilibrium if its required return v 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

A stock is in equilibrium if its required return v 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
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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### Stock Analysis and Expected Returns #### Stock Data: | Stock | Beta | Standard Deviation | Expected Return | |-------|------|--------------------|-----------------| | DET | 0.7 | 25% | 8.0% | | AIL | 1.0 | 38% | 10.0% | | INO | 1.6 | 34% | 13.5% | #### Analysis Overview: An analyst has used both market-specific and firm-specific data to estimate expected returns for each stock. It's important to note that the analyst’s expected returns might not necessarily match the stocks' required returns. #### Financial Context: - **Risk-Free Rate (\(R_{RF}\))**: 6% - **Market Risk Premium (\(R_{PM}\))**: 4% The provided graph uses the Security Market Line (SML) to visually represent each stock’s beta and expected return. #### Graph Explanation: - The x-axis represents the Beta of each stock. - The y-axis represents the Expected Return (in percent). On the graph, each stock is plotted as follows: - **Stock DET** is represented by a square. - **Stock AIL** is represented by an upward triangle. - **Stock INO** is represented by a circle. The line on the graph represents the Security Market Line, showing the relationship between the risk (Beta) and expected return of the market. Clicking on any point on the graph allows viewing the specific coordinates, i.e., the beta and expected return for each stock.
Transcribed Image Text:### Stock Analysis and Expected Returns #### Stock Data: | Stock | Beta | Standard Deviation | Expected Return | |-------|------|--------------------|-----------------| | DET | 0.7 | 25% | 8.0% | | AIL | 1.0 | 38% | 10.0% | | INO | 1.6 | 34% | 13.5% | #### Analysis Overview: An analyst has used both market-specific and firm-specific data to estimate expected returns for each stock. It's important to note that the analyst’s expected returns might not necessarily match the stocks' required returns. #### Financial Context: - **Risk-Free Rate (\(R_{RF}\))**: 6% - **Market Risk Premium (\(R_{PM}\))**: 4% The provided graph uses the Security Market Line (SML) to visually represent each stock’s beta and expected return. #### Graph Explanation: - The x-axis represents the Beta of each stock. - The y-axis represents the Expected Return (in percent). On the graph, each stock is plotted as follows: - **Stock DET** is represented by a square. - **Stock AIL** is represented by an upward triangle. - **Stock INO** is represented by a circle. The line on the graph represents the Security Market Line, showing the relationship between the risk (Beta) and expected return of the market. Clicking on any point on the graph allows viewing the specific coordinates, i.e., the beta and expected return for each stock.
**Graph Description:** The graph presents a comparison between the rate of return (in percent) and risk (measured by Beta) for three different stocks: DET, AIL, and INO. - The x-axis represents Risk (Beta), ranging from 0 to 2.0. - The y-axis represents the Rate of Return, ranging from 0% to 20%. - A positively sloped line is plotted, indicating that as risk increases, the expected rate of return also increases. Three distinct markers represent the stocks: - **Stock DET** is depicted as an orange square on the graph. - **Stock AIL** is shown as a green triangle. - **Stock INO** is identified as a purple diamond. **Text Explanation:** A stock is in equilibrium if its required return is equal to 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. - Stock DET is ______________. *(The blanks are placeholders for additional information regarding whether the stocks are undervalued or overvalued based on the analyst's estimates.)*
Transcribed Image Text:**Graph Description:** The graph presents a comparison between the rate of return (in percent) and risk (measured by Beta) for three different stocks: DET, AIL, and INO. - The x-axis represents Risk (Beta), ranging from 0 to 2.0. - The y-axis represents the Rate of Return, ranging from 0% to 20%. - A positively sloped line is plotted, indicating that as risk increases, the expected rate of return also increases. Three distinct markers represent the stocks: - **Stock DET** is depicted as an orange square on the graph. - **Stock AIL** is shown as a green triangle. - **Stock INO** is identified as a purple diamond. **Text Explanation:** A stock is in equilibrium if its required return is equal to 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. - Stock DET is ______________. *(The blanks are placeholders for additional information regarding whether the stocks are undervalued or overvalued based on the analyst's estimates.)*
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