If you plot a Beta of 1.0 on the horizontal axis of the SML, what value is then reflected on the vertical axis? Can anyone find a stock that has a Beta of 1.0 (or very close to that)? What does that tell you about this stock? Is this a good investment?
If you plot a Beta of 1.0 on the horizontal axis of the SML, what value is then reflected on the vertical axis? Can anyone find a stock that has a Beta of 1.0 (or very close to that)? What does that tell you about this stock? Is this a good investment?
Related questions
1. Acne Corp. has a beta of 0.82. The risk-free rate of return is 4.25 percent and the market rate of return is 14.60 percent. Find
a. The stock's required rate of return
b. The y intercept value (vertical axis) on the Security Market Line. (hint: zero beta on horizontal axis)
2. What is the expected (or required) return on this portfolio?
| Stock | Expected Return | Number of Shares | Stock Price |
|---|---|---|---|
| A | 12% | 300 | $28 |
| B | 7% | 500 | $10 |
| C | 15% | 600 | $13 |
3. What is the expected (or required) return on a portfolio that is equally weighted between stocks K and L given the following information?
| Returns if State Occurs | |||
|---|---|---|---|
| State of Economy | Probability of State of Economy | Stock K | Stock L |
| Boom | 25% | 16% | 13% |
| Normal | 75% | 12% | 8% |
Keith holds a portfolio that is invested equally in three stocks (Wd = Wa = Wi = 1/3). Each stock is described in the following table:
| Stock | Beta | Standard Deviation | Expected Return |
| DET | 0.7 | 25% | 8% |
| AIL | 1.0 | 38% | 10% |
| INO | 1.6 | 34% | 13.5% |
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.
The risk-free rate (Rf) is 6% and the market risk premium (Rp) is 4%. Use the following graph with the security market line (SML) to plot each stock's beta and expected return.
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 expected return estimates, stock INO is ___________, stock AIL is equilibrium, and stock DET is _________.
