The security market line is estimated to be

k=6% + (10.7% - 6%).

You are considering two stocks. The beta of A is 1.3. The firm offers a dividend yield during the year of 6 percent and a growth rate of 7.3 percent. The beta of B is 1.1. The firm offers a dividend yield during the year of 7.8 percent and a growth rate of 6.4 percent.

1. What is the required return for each security? Round your answers to two decimal places.

Stock A: %

Stock B: %

2. Why are the required rates of return different?

The difference in the required rates of return is the result of -Select-stock Astock BItem 3 being riskier.

3. Since A offers higher potential growth, should it be purchased?

Stock A -Select-shouldshould notItem 4 be purchased.

4. Since B offers higher dividend yield, should it be purchased?

Stock B -Select-shouldshould notItem 5 be purchased.

5. Which stock(s) should be purchased?

-Select-Stock AStock BNeither of stocksBoth stocksItem 6 should be purchased.