Wilson holds a portfolio that invests equally in three stocks (WA = W8 = Wa H 1/3). Each stock is described in the following table: Stock Beta Standard Deviation Expected Return A 0.5 23% 1.5% B 1.0 38% 12.0% C 2.0 45% 14.0% 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 [TR] is 4%, and the market risk premium [RPM] is 5%. Given this information, use the following graph of the security market line (SML) to plot each stock's beta and expected return on the graph. Tool tip: mouse over the points on the graph to see their coordinates. RATE OF RETURN (Percent) 20 Stock A TE 16 Stock B 14 12 16 Stock C B ignment 08 - Risk and Rates of Return RAE UP RETURN trecem 20 Stock A 18 16 12 Stock B A 12 Stock C 8 1 6 2 0 0.0 0.2 0.4 0.6 0.8 1.0 1.2 1.4 1.6 1.8 2.0 RISK (Beta) Clear AU A stock is in equilibrium if its expected return and stocks are in equilibrium (or fairly valued) prospects and may think that a stock is out of expected return estimates, Stock A is equilibrium and fairly valued. equals is less than is more than its required return. In general, assume that markets investors have different opinions about a stock's er undervalued or overvalued). Based on the analyst's Bis and Stock C is in Stock A 1 5 Stock B 4 2 Stock c 70 8 6 40 2 0 0.0 0.2 0.4 0.6 0.8 1.0 1.2 1.4 1.6 1.8 2.0 RISK (Beta) Clear All stock is in equilibrium if its expected return its required return. In gener and stocks are in equilibrium (or fairly valued), but sometimes investors have different opini prospects and may think that a stock is out of equilibrium (either undervalued or overvalued 2xpected return estimates, Stock A is Stock Bis equilibrium and fairly valued. undervalued overvalued in equilibrium and Stock C RISKEBeta Clear All ed return its required return. In general, assume that markets Hy valued), but sometimes investors have different opinions about a stock's Ek is out of equilibrium (either undervalued or overvalued). Based on the analyst's is Stock Bis and Stock C is in overvalled in equilibrium undervalued