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wilson holds a portfolio that invests equally in three stocks (WA-WB-wc-1/3). Each stock is described in the following table: Stock Beta Standard Deviation Expected Return

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wilson holds a portfolio that invests equally in three stocks (WA-WB-wc-1/3). Each stock is described in the following table: Stock Beta Standard Deviation Expected Return 0.5 1.0 2.0 7.5% 12.0% 14.0% 23% 39% 45% An analyst has used market-and firm-specific information to generate expected return estimates for each stock. The analyst's expected return estimates may or may not equal the stocks' required returns. You've also determined that the risk-free rate [np] is 4%, and the market risk premium [RPM ] is 5%. Given this information, use the following graph of the security market ine (SML) to plot each stock's beta and expected return on the graph. Tool tip: Mouse over the points in the graph to see their coordinates. Stock A Stock B 10 Stock C 0 02 04 06 08 10 12 14 1 18 20 RISK (Beta) A stock is in equilibrium if its expected return or fairly valued), but sometimes investors have different opinions about a stock's prospects and may think that a stock is out of equilibrium (either undervalued or overvalued). Based on the analyst's expected return estimates, Stock A is Stock C is in equilibrium and fairly valued. its required return. In general, assume that markets and stocks are in equilibrium Stock B is and

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