The risk-free rate is 4% and the expected return on the market is 14%. The following information is available on stocks A and B:

Stock A Stock B

Beta 1.60 1.20 Expected dividend next year $2.75 $1.40 Growth rate (g) 6% 7% Current Price (p0) $16 $25

What are the required rates of return on both stocks using the CAPM model? What are the expected rates of returns of both stocks using the dividend growth model? Would you recommend purchasing or selling the stocks? At what prices would the sticks be in equilibrium, i.e. change the stock from buy or sell to hold.

Explain the differences between the beta and standard deviation of a stock?