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Stock X has systematic risk of = 1 and the analyst forecasts its return to be 12%. Stock Y has = 1.5 and a forecast
Stock X has systematic risk of = 1 and the analyst forecasts its return to be 12%. Stock Y has = 1.5 and a forecast return of 13%. The market portfolios expected return is 11%, and rf = 5%. i. According to the CAPM, what are the required returns of the two stocks? ii. What is the alpha of each stock? Which stock is a better buy? iii. Draw the SML. Mark each stocks CAPM required rate of return on the line and the forecast return. Mark their alphas on the graph.
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