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.

Corporate Fin Focused Approach
5th Edition
ISBN:9781285660516
Author:EHRHARDT
Publisher:EHRHARDT
Chapter6: Risk And Return
Section: Chapter Questions
Problem 14P
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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.
Transcribed Image Text: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.
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