Stock X has systematic risk of betax=1 and the analyst forecasts its return to be 12%. Stock Y has betay -1.5 and the analyst forecasts its return to be 13%. The market portfolio's expected return is 11%, and r+= 5%. 1. According to the CAPM, what are the required returns of the two stocks? 2. What is the alpha of each stock? Which stock is a better buy? 3. Draw the SML. Mark each stock's CAPM required rate of return on the line and the forecast return. Mark their alphas on the graph.

Stock X has systematic risk of betax=1 and the analyst forecasts its return to be 12%. Stock Y has betay -1.5 and the analyst forecasts its return to be 13%. The market portfolio's expected return is 11%, and r+= 5%. 1. According to the CAPM, what are the required returns of the two stocks? 2. What is the alpha of each stock? Which stock is a better buy? 3. Draw the SML. Mark each stock's CAPM required rate of return on the line and the forecast return. Mark their alphas on the graph.

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter2: Risk And Return: Part I

Section: Chapter Questions

Problem 12P: Stock R has a beta of 1.5, Stock S has a beta of 0.75, the expected rate of return on an average...

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