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Keith holds a portfolio that is invested equally in three stocks (wD-WA-W1-1/3). Each stock is described in the following table: Stock Beta Standard Deviation Expected
Keith holds a portfolio that is invested equally in three stocks (wD-WA-W1-1/3). Each stock is described in the following table: Stock Beta Standard Deviation Expected Return DET 0.7 AIL 1.0 INO 1.6 25% 38% 34% 8.0% 10.0% 13.5% An analyst has used market- and firm-specific information to make expected return estimates for each stock. The analyst's expected return estimates may or may not equal the stocks' required returns Therisk-heerate(r.jis6%andthe marketriskpremi nlR%)is4%usethefollowinggraphwiththesecurity market line (SML) to plot each stock's beta and expected return. Tool tip: Mouse over the points on the graph to see their coordinates RATE OF RETURN (Percent] 20 18 16 14 12 10 Stock DET Stock AIL Stock INO 0.0 0.2 0.4 0.6 0.8 1.0 1.2 1.4 1.6 1.8 2.0 RISK (Beta) Clear ALL A stock is in equilibrium if its required return and stocks are in equilibrium (or fairly valued), but sometimes investors have different opinions about a stock's prospects and may think that a stock is out of equilibrium (either undervalued or overvalued). Based on the analyst's expected return estimates, stock INO is its expected return. In general, assume that markets , stock AIL is in equilibrium, and stock DET is
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