Question
Given that the expected return on the market portfolio is 10%, the riskfree rate of return is 6%, the beta of stock A is 0.85,
Given that the expected return on the market portfolio is 10%, the riskfree rate of return is 6%, the beta of stock A is 0.85, and the beta of stock B is 1.20:
a. Draw the SML
b. What is the equation for the SML? [6%+(4%)β]
c. What are the equilibrium expected returns for stocks A and B? [9.4%], [10.8%]
d. Plot the two risky securities on the SML.
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Principles of Corporate Finance
Authors: Richard A. Brealey, Stewart C. Myers, Franklin Allen
10th Edition
9780073530734, 77404890, 73530735, 978-0077404895
