1. a. You expect an RFR of 10 percent and the market return ( R M ) of 14 percent. Compute the expected return for the following stocks, and plot them on an SML graph.
Stock B e t a E ( R i )
U 0.85
N 1.25
D -0.20
b. You ask a stockbroker what the firm's research department expects for these three stocks. The broker responds with the following information:
|
Stock
|
Current Price
|
Expected Price
|
Expected Dividend
|
|
U
|
22
|
24
|
0.75
|
|
N
|
48
|
51
|
2.00
|
|
D
|
37
|
40
|
1.25
|
Plot your estimated returns on the graph from Part a and indicate what actions you would take with regard to these stocks. Explain your decisions.