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4. Stock Risk and Pricing: (15 points) You are analyzing Club Auto Parts Co. The risk-free rate (rf) is 2%, the return on the market

4. Stock Risk and Pricing: (15 points)

You are analyzing Club Auto Parts Co. The risk-free rate (rf) is 2%, the return on the market (rm) is 6%, and the stocks beta (b) is 1.5.

4a. What is the required rate of return in the SML model? (Show all work.)

4b. Club Auto Parts Co. went public five years ago. Based on the stock performance below, what is its expected rate of return? (Show all work.)

Year

Return

2012

25%

2013

-13%

2014

9%

2015

9%

2016

11%

4c. Based on the above information, would you invest in Club Auto Parts stock? Why?

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