Problem $11-07$

The security market line is estimated to be

$k=5\%+(9\mathrm{.}6\%-5\%)$

dividend yield during the year of $6\mathrm{.}2$ percent and a growth rate of $5\mathrm{.}8$ percent.

a$.$ What is the required return for each security? Round your answers to two decimal places.

Stock A: $\%$

Stock B: $\%$

b$.$ Why are the required rates of return different?

The difference in the required rates of return is the result of being riskier.

c$.$ Since A offers higher potential growth, should it be purchased?

Stock A be purchased.

d$.$ Since B offers higher dividend yield, should it be purchased?

Stock B be purchased.

e$.$ Which stock$($s$)$ should be purchased?

should be purchased.