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Van holds a portfolio that is invested equally in three stocks. An analyst has used market- and firm-specific information to make expected return estimates for
Van holds a portfolio that is invested equally in three stocks. An analyst has used market- and firm-specific information to make expected return estimates for each stock. Each stock is described in the following table: Stock Beta Expected Return PPQ 1.4 16% RRT 0.4 8% WYY 1.2 14% The risk-free rate, Rf , is 8 percent and the market return, Rm is 13 percent. The line given on the following graph represents the security market line (SML), which is derived from the CAPM equation: Rj=Rf+Bj(RmRf) . Use the following graph with the security market line to plot each stocks beta and expected return. (Note: Click the points on the graph to see their coordinates.) PPQ RRT WYY 0 0.2 0.4 0.6 0.8 1.0 1.2 1.4
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