The security market line is estimated to be k=5% + (12.9% - 5%). You are considering two stocks. The beta of A is 1.2. The firm offers a dividend yield during the year of 5 percent and a growth rate of 7.5 percent. The beta of B is 0.7. The firm offers a dividend yield during the year of 6.3 percent and a growth rate of 7 percent.

What is the required return for each security? Round your answers to two decimal places. Stock A: % Stock B: %

Why are the required rates of return different? The difference in the required rates of return is the result of being riskier. Since A offers higher potential growth, should it be purchased? Stock A be purchased. Since B offers higher dividend yield, should it be purchased? Stock B be purchased.

Which stock(s) should be purchased? should be purchased.