Question

An analyst expects a risk-free return of 4.5 percent, a market return of 14.5 percent, and the returns for Stocks A and B that are shown in Exhibit.


a. Show on a graph:
(1) Where Stocks A and B would plot on the security market line (SML) if they were fairly valued using the capital asset pricing model (CAPM).
(2) Where Stocks A and B actually plot on the same graph according to the returns estimated by the analyst and shown in Exhibit.
b. State whether Stocks A and B are undervalued or overvalued if the analyst uses the SML for strategic investmentdecisions.


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  • CreatedDecember 17, 2014
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