q6

Keith holds a portfolio that is invested equally in three stocks (wp-WA-W-1/3). Each stock is described in the following table: Stock DET AIL INO (0) 4 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. R Beta Standard Deviation Expected Return 0.7 1.0 1.6 The risk-free rate [rup] is 6%, and the market risk premium [RPst] is 4%. Use the following graph with the security market line (SML) to plot each stock's beta and expected return. (Note: Click on the points on the graph to see their coordinates.) # 25% 38% 34% 2 8.0% 10.0% 13.5% Stock DET A ? 18 10 RATE OF RETURN (Percent) 6 . 2 0 0 02 0.4 0.8 0.8 1.0 1.2 14 16 18 20 RISK (Beta) Stock DET A Stock AIL Stock INO D A stock is in equilibrium if its required return its expected return. In general, assume that markets 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 stock AIL is in equilibrium, and stock DET is