(a) Stock XYZ has an expected return of 12 %, and risk of β and = 1.0. Stock ABC is expected to return 13 % with a beta of 1.5. The markets expected return is 11 % and risk free rate is 5 %. Which stock is a better buy? What is the alpha of each stock? Plot the SML and the two stocks and show the alphas of each on the graph?
(a) Stock XYZ has an expected return of 12 %, and risk of β and = 1.0. Stock ABC is expected to return 13 % with a beta of 1.5. The markets expected return is 11 % and risk free rate is 5 %. Which stock is a better buy? What is the alpha of each stock? Plot the SML and the two stocks and show the alphas of each on the graph?
Intermediate Financial Management (MindTap Course List)
13th Edition
ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
Publisher:Eugene F. Brigham, Phillip R. Daves
Chapter2: Risk And Return: Part I
Section: Chapter Questions
Problem 12P: Stock R has a beta of 1.5, Stock S has a beta of 0.75, the expected rate of return on an average...
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(a) Stock XYZ has an expected return of 12 %, and risk of β and = 1.0. Stock ABC is expected to return 13 % with a beta of 1.5. The markets expected return is 11 % and risk free rate is 5 %. Which stock is a better buy? What is the alpha of each stock? Plot the SML and the two stocks and show the alphas of each on the graph?
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