Your client is confused. He owns shares in the Whistler Snow-Making Company (WSMC) and wants you to explain your recommendation. Both of you agree on the following: WSMC has an expected return of 12 percent, a standard deviation of 9 percent, and a beta of 1.25; the expected return on the market is 8 percent, with standard deviation of 3 percent; and the risk-free rate is 4 percent.
Your client has a basic understanding of the CAPM and, based on the capital market line, feels he should sell the stock. However, you are recommending that he buy more of the stock (or at least hold what he has). Explain your recommendation to your client.