10. The Capital Asset Pricing Model and the security market line Wilson holds a portfolio that invests equally in three stocks (WA W - We = 1/3). Each stock is described in the following table: Standard Deviation Expected Return 239 7.5% Stock A B C Beta 0.5 1.0 2.0 38% 12.0% 45% 14.0% An analyst has used market and firm-specific information to generate expected return estimates for each stock. The analyst's expected return estimates may or may not equal the stocks' required returns. You've also determined that the risk-free rate hapis 4%, and the market risk premium (RPM) is 5% Given this information, use the following graph of the security market line (SML) to plot each stock's beta and expected return on the graph. (Note: Click on the points on the graph to see the coordinates.) Ch 08: Assignment - Risk and Rates of Return StockA Stock B RATE OF RETURN (Percent) Stock C 0 14 16 18 20 02 04 06 08 10 12 RISK (Beta) RATE OF RETUR 0 02 04 06 equals 08 10 12 RISK (Beta) is more than A stock is in equilibrium if its expected return its required return. In general, assume that markets and stocks are in equilbrium (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 As Stock is Stock C is in equilibrium and fairly valued Grade R Now Save A Continue RATE OF RETUR B 78 * 08 10 12 RISK (teta 14 16 18 undervalued overvalued A stock is in equilibrium if its expected return is required return. In (or fairly valued), but sometimes investors have different counions about a stock's prosped undervalued or overvalued). Based on the analyst's expected return estimates Stock AS Stock is in equilibrium and fearly valued. markets and stocks are in equilibrium that a stock is out of equilibrium (either - Stock Bis RATE OF RE Stock 0 02 04 06 08 10 12 RISK (Beta) 14 16 in equilibrium undervalued A stock is in equilibrium if its expected return its required retum. In general, assume that markets and (or fairly valued), but sometimes investors have different opinions about a stock's prospects and may think that a stock is undervalued or overvalued). Based on the analyst's expected return estimates, Stock Als Stock Bis Stock C is in equilibrium and fairly valued. Overvalued (either