Given an expected return for the market of 12 percent, with a standard deviation of 20 percent, and a risk-free rate of 8 percent, consider the following data:
$\begin{array}{lll}\underline {Stock}&\underline { Beta }&\underline { \mathrm{R}_{\mathrm{i}}(\%) }\\1 & 0.8 & 12 \\2 & 1.2 & 13 \\3 & 0.6 & 11\end{array}$ (a) Calculate the required return for each stock using the SML.
(b) Assume that an analyst, using fundamental analysis, develops the estimates labeled R_i for these stocks. Which stock would be recommended for purchase?

Question

Given an expected return for the market of 12 percent, with a standard deviation of 20 percent, and a risk-free rate of 8 percent, consider the following data:

\begin{array}{lll}\underline {Stock}&\underline { Beta }&\underline { \mathrm{R}_{\mathrm{i}}(\%) }\\1 & 0.8 & 12 \\2 & 1.2 & 13 \\3 & 0.6 & 11\end{array}

(a) Calculate the required return for each stock using the SML.
(b) Assume that an analyst, using fundamental analysis, develops the estimates labeled R_i for these stocks. Which stock would be recommended for purchase?

Quizplus · Accepted Answer

The Answer of Given an expected return for the market of 12 percent, with a standard deviation of 20 percent, and a risk-free rate of 8 percent, consider the following data: $\begin{array}{lll} \underline {Stock}&\underline { Beta }&\underline { \mathrm{R}_{\mathrm{i}}(\%) }\ 1 & 0.8 & 12 \ 2 & 1.2 & 13 \ 3 & 0.6 & 11 \end{array}$ (a) Calculate the required return for each stock using the SML. (b) Assume that an analyst, using fundamental analysis, develops the estimates labeled R_i for these stocks. Which stock would be recommended for purchase?

Given an Expected Return for the Market of 12 Percent