Problem 7-02 a. You expect an RFR of 7 percent and the market return (RM) of 14 percent. Compute the expected return for the following stocks. Round your answers to two decimal places. Choose the correct SML graph. The correct graph is -Select- A. -0.6 -0.4 Rm E(RI) -0.18- 0.16- -0.14- -0.2 0.12 0.1- 0.08- -0.06 0.04- -0.02- . 0.2 Security market Line 0.4 Stock U N D 0.6 Beta 0.70 1.45 -0.15 0.8 1.2 E(R) 1.4 % % % SML Beta B. C. -0.6 -0.4 -0.6 -0.4 Rm 0.14- -0.2 Rm E(RI) 0.18 0.16 -0.2 0.12 D 0.1 0.08 0.06. 0.04 0.02 E(RI) 0.18 0.16 0.14 0.12 0.1 0.08 -0.06 0.04 0.02 Security market Line 0.4 0.6 0.8 Security market Line 0.2 0.2 0.4 0.6 0.8 1.2 1.2 1.4 1.4 SML Beta SML- Beta D. -0.6 -0.4 E(RI) I 0.18- 0.16- -0.14- Rm 0.12 -0.2 0.1- 0.08- -DO.06- 0.04 -0.02- Security market Line 0.2 0.4 23 44 38 0.6 0.8 1.2 26 46 42 Stock Current Price Expected Price Expected Dividend U N D 1.4 b. You ask a stockbroker what the firm's research department expects for these three stocks. The broker responds with the information below. Indicate what actions you would take with regard to these stocks. Round your answers to two decimal places. 0.60 1.95 1.10 N SML If you believe the appropriateness of these estimated returns, you would buy -Select- Choose the correct SML graph. Note that labels with asterisk denote estimated returns. The correct graph is-Select- . Beta Estimated Return % % % and sell -Select- Evaluation -Select- -Select- -Select- V V V A. B. -0.6 -0.4 -0.6 -0.4 Rm -0.2 E(RI) I 0.18 Q.16- CA -0.14- -0.2 0.12 0.1 0.08 0.06 0.04- 0.02 E(RI) 0.18- 0.16- Rm 0.14- *0.12- D 0.1 0.08+ 0.06- 0.04- 0.02- Security market Line 0.2 0.4 0.6 0.8 Security market Line 0.2 0.4 *U 0.6 *U* 0.8 1.2 1.2 1.4 1.4 *N *N SML- Betal SML Beta C. D. -0.6 -0.4 -0.6 -0.4 -0.2 Rm E(RI) 0.18- Rm 0.12- 0.16- Q.14- -0.2 -DO.06+ 0.1 0.08- 04 0.02- E(Ri) 0.18 0.16- 0.14 8.12 D 0.1- 0.08 0.06 0.04 0.02 Security market Line 0.2 0.4 0.6 0.8 Security market Line 0.2 0.4 *U* 0.6 *U* 0.8 1 1.2 1.2 1.4 1.4 SML *N _N Beta SML- *N- Beta