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Question 5 (10 Marks) The equity analyst team of the North Rock Asset Management Group has gathered the following information for stock Grainy and stock
Question 5 (10 Marks) The equity analyst team of the North Rock Asset Management Group has gathered the following information for stock Grainy and stock Vege: Stock Grainy Expected Return % Standard Deviation % Beta 12 32 Stock Vege 15 21 1.3 0.6 Assume that the expected rate of return on the market is 12% and the risk-free rate is 5%. a. What would be the fair return for each stock, Grainy and Vege, according to the capital asset pricing model (CAPM)? 4 marks b. Plot the two stocks: Grainy and Vege on the SML graph. What are the alphas of each? Which security would be considered the better buy? Briefly explain your answers. 6 marks Show all your calculations
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