Question
5. The capital asset pricing model Manuel holds a portfolio that is invested equally in three stocks. An analyst has used market- and firm-specific information
5. The capital asset pricing model
Manuel holds a portfolio that is invested equally in three stocks. An analyst has used market- and firm-specific information to make expected return estimates for each stock. Each stock is described in the following table:
Stock | Beta | Expected Return |
---|---|---|
NYD | 1 | 6% |
IOP | 1.6 | 8% |
ROP | 0.6 | 4% |
The risk-free rate, RfRf, is 4 percent and the market return, RmRm is 6 percent. The line given on the following graph represents the security market line (SML), which is derived from the CAPM equation: Rj=Rf+Bj(RmRf)Rj=Rf+Bj(RmRf). Use the following graph with the security market line to plot each stocks beta and expected return. (Note: Click the points on the graph to see their coordinates.)
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