10. The Capital Asset Pricing Model and the security market line Keith holds a portfolio that is invested equally in three stocks (wp-WA-W-1/3). Each stock is described in the following table: Stock Beta Standard Deviation DET 0.7 Expected Return 8.0% 25% 1.0 AIL INO 10.0% V 12 38% 34% 1.6 13.5% EP An analyst has used market and firm-specific information to make expected return estimates for each stock. The analyst's expected retum estimates may or may not equal the stocks' required returns The risk-free rate trep) is 6%, and the market risk premium (RPM) is 4%. Use the following graph with the security market line (SL) te plot each stock's beta and expected return. (Note: Click on the points on the graph to see their coordinates.) 20 18 Stock DET te 14 Stock AIL 12 RATE OF RETURN (Percent) 10 Stock INO 2 20 D 18 10 Stock DET 4 12 Stock AIL RATE OF RETURN (Percent) - 10 . Stock INO B 2 0 02 0.4 0 06 1.4 1.6 18 20 0.A 1.0 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 (or faldly valued), but sometimes investors have different opinions about a stock's prospects and may think that a stock out of equilibrium (ether undervalued or overvalued). Based on the analyst's expected return estimates, stock INOIS stock All is in equilibrium, and stock DET IS Grade It Now Save & Conti Continue without saving RES