5 The capital asset pricing model Nick 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 AYS 0 6 8 QET 1 10 EWQ 1 6 14 The risk free rate, RfRf, is 6 percent and the market return, RmRm is 10 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 ) AYSQETEWQ00 20 40 60 81 01 21 41 61 82 020181614121086420RATE OF RETURN (Percent)RISK (Beta)2, 16Y Intercept 6Slope 4 Sometimes investors have different opinions about a stocks prospects and may think that a stock is either undervalued or overvalued Determine the required rate of return for each stock, and then use the analysts expected return estimates to determine whether he thinks each stock in Nicks portfolio is undervalued, overvalued, or fairly valued Stock Required Rate of Return Valuation (Percent) AYS QET EWQ 5 The capital asset pricing model Nick 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 8 AYS 0 6 1 10 QET EWQ 1 6 14 The risk free rate, Ry, is 6 percent and the market return, Rm is 10 percent The line given on the following graph represents the security market line (SML), which is derived from the CAPM equation R R B (RM Ry) Use the following graph with the security market line to plot each stock's beta and expected return (Note Click the points on the graph to see their coordinates ) 20 18 AYS 16 14 A 12 QET RETURN (Percent) 10 14 A QET RATE OF RETURN (Percent) EWQ 2 0 0 0 2 0 4 0 6 1 4 1 6 1 8 2 0 0 8 1 0 1 2 RISK (Beta) Sometimes investors have different opinions about a stock's prospects and may think that stock is either undervalued or overvalued Determine the required rate of return for each stock, and then use the analyst's expected return estimates to determine whether he thinks each stock in Nick's portfolio is undervalued, overvalued, or fairly valued Required Rate of Return (Percent) Stock Valuation AYS QET EW

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5. The capital asset pricing model Nick holds a portfolio that is invested equally in three stocks. An analyst has used market- and firm-specific information

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5. The capital asset pricing model

Nick 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
AYS	0.6	8%
QET	1	10%
EWQ	1.6	14%

The risk-free rate, RfRf, is 6 percent and the market return, RmRm is 10 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.)

AYSQETEWQ00.20.40.60.81.01.21.41.61.82.020181614121086420RATE OF RETURN (Percent)RISK (Beta)2, 16Y-Intercept: 6Slope: 4

Sometimes investors have different opinions about a stocks prospects and may think that a stock is either undervalued or overvalued.

Determine the required rate of return for each stock, and then use the analysts expected return estimates to determine whether he thinks each stock in Nicks portfolio is undervalued, overvalued, or fairly valued.

Stock	Required Rate of Return	Valuation
Stock	(Percent)	Valuation
AYS
QET
EWQ

5. The capital asset pricing model Nick 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 8% AYS 0.6 1 10% QET EWQ 1.6 14% The risk-free rate, Ry, is 6 percent and the market return, Rm is 10 percent. The line given on the following graph represents the security market line (SML), which is derived from the CAPM equation: R; = R+ B;(RM - Ry). Use the following graph with the security market line to plot each stock's beta and expected return. (Note: Click the points on the graph to see their coordinates.) ? 20 18 AYS 16 14 A 12 QET RETURN (Percent) 10 . 14 A QET RATE OF RETURN (Percent) EWQ 2 0 0 0.2 0.4 0.6 1.4 1.6 1.8 2.0 0.8 1.0 1.2 RISK (Beta) Sometimes investors have different opinions about a stock's prospects and may think that stock is either undervalued or overvalued. Determine the required rate of return for each stock, and then use the analyst's expected return estimates to determine whether he thinks each stock in Nick's portfolio is undervalued, overvalued, or fairly valued. Required Rate of Return (Percent) Stock Valuation AYS QET EW