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Keith holds a portfolio that is invested equally in three stocks (wp = WA - wy...

Question:

Keith holds a portfolio that is invested equally in three stocks (wp = WA - wy - 1/3). Each stock is described in the followi
Stock DET Stock AIL RATE OF RETURN (Percent) Stock INO 14 16 18 20 02 04 06 08 10 12 RISK (Beta) A stock is in equilibrium if
Keith holds a portfolio that is invested equally in three stocks (wp = WA - wy - 1/3). Each stock is described in the following table: Standard Deviation Expected Return Beta 0.7 1.0 25% Stock DET AIL INO 8.09 38% 10.0% 1.6 34% 13.54 An analyst has used market and firm specific information to make expected return estimates for each stock. The analyst's expected return estimates may or may not equal the stocks' required returns. The risk-free rate [ ] is 6%, and the market risk premium (RPM) is 4%. Use the following graph with the security market line (SML) to plot each stock's beta and expected retum. (Note: Click on the points on the graph to see their coordinates.) Stock DET (Percent) Stock AIL
Stock DET Stock AIL RATE OF RETURN (Percent) Stock INO 14 16 18 20 02 04 06 08 10 12 RISK (Beta) A stock is in equilibrium if its required return its expected return. In general, assume that markets and stocks are in equilibrium for fairly valued), but sometimes investors have different opinions about a stock's prospects and may think that a stock is out of equilibrium (either undervalued or overvalued). Based on the analyst's expected return estimates, stock INOIS stock AIL is in equilibrium, and stock DET is

Answers

→is Equal to → Stock InO is OVER - VALUED (since, Required Return > Expected Return] Rp + Betax MRP 6%+ 0.70 4 8.8 % → Stock

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