Stock A Beta 0.5 1.0 2.0 Standard Deviation 23% 38% 45% Expected Return 7.5% 12.0% B C 14.0% An analyst has used market and form-specific information to generate expected return estimates for each stock. The analyst's expected return estimates may or may not equal the stocks' required returns. You've also determined that the risk-free rate (F) is 4%, and the market risk prem RPM) is 5% Given this information, use the following graph of the security market line (SML) to plot each stock's beta and expected return on the graph. Tool tip: Mouse over the points in the graph to see their coordinates. Stock A Stock B OF RETURN (Percent) Stock C Stock A Stock B RATE OF RETURN (Percent) Stock C 0 0.2 0.4 06 14 16 18 20 08 10 12 RISK (Beta) A stock is in equilibrium if its expected return its required 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 Als Stock B is Stock C is in equilibrium and fairly valued. and