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An analyst expects a risk-free return of 4.5 percent, a market return of 14.5 percent, and the returns for Stocks A and B that are
An analyst expects a risk-free return of 4.5 percent, a market return of 14.5 percent, and the returns for Stocks A and B that are shown in the following table.
Stock | Beta | Analyst Estimated Return |
A | 1.2 | 16% |
B | 0.8 | 14% |
Show on the graph
a) Where Stock A and B would plot on the security market line (SML) if they were fairly valued using the capital asset pricing model (CAPM)
b) Where Stock A and B actually plot on the same graph according to the returns estimated by the analyst and shown in the table
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