Keith holds a portfolio that is invested equally in three stocks (wDwD = wAwA = wIwI = 1/3). Each stock is described in the following table:

Stock	Beta	Standard Deviation	Expected Return
DET	0.7	25%	8.0%
AIL	1.0	38%	10.0%
INO	1.6	34%	13.5%

An analyst has used market- and firm-specific information to make expected return estimates for each stock. The analysts expected return estimates may or may not equal the stocks required returns.

The risk-free rate [rRFrRF] is 6%, and the market risk premium [RPMRPM] is 4%. Use the following graph with the security market line (SML) to plot each stocks beta and expected return. (Note: Click on the points on the graph to see their coordinates.)

A stock is in equilibrium if its required return ________ ( is less than, equal, more than) its expected return. In general, assume that markets and stocks are in equilibrium (or fairly valued), but sometimes investors have different opinions about a stocks prospects and may think that a stock is out of equilibrium (either undervalued or overvalued). Based on the analysts expected return estimates, stock INO is ________ ( undervalued, in equilibrium, overvalued) , stock AIL is in equilibrium, and stock DET is ________ ( undervalued, in equilibrium, overvalued) .

? 20 18 Stock DET 16 14 12 Stock AIL RATE OF RETURN (Percent) 10 8 Stock INO 6 4 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)