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.)