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Question 3 (25 marks) The following information describes the expected return and risk relationship for the stocks of two of SmartRealty's competitors. Beta Stock Accerareal
Question 3 (25 marks) The following information describes the expected return and risk relationship for the stocks of two of SmartRealty's competitors. Beta Stock Accerareal Stock Oxley Real Market Portfolio Risk-free Rate Expected Return (%) 12 9 10 5 Standard Deviation (%) 20(%) 15 12 1.3 0.7 1.0 (a) Draw and label a graph showing the Security Market Line (SML) and position stocks Accerareal and Oxley Real relative to it. (10 marks) (b) Alpha is the difference between a stock's expected return and the equilibrium expected return given by the SML. Compute the alphas both for Accerareal and Oxley Real. Show your workings. (10 marks) (C) Assume that the risk-free rate rises to 7% with the other data remaining unchanged. Select the stock providing the higher expected risk-adjusted return and justify your selection. Show your calculations
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