Question: You are using a SML approach to stock selection. You want to set up a long and short position. Equity market risk premium: 6% Risk

You are using a SML approach to stock selection. You want to set up a long and short position.

Equity market risk premium: 6%

Risk free rate: 2%.

Analyst Expected Return

Beta

Stock 1

8.6%

1.1

Stock 2

9.5%

1.2

Stock 3

8.0%

1.0

Stock 4

7.2%

0.9

Based on the data above, which stock would give you a long position and which stock would give you a short position?

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