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7. The Capital Asset Pricing Model and the security market line Keith holds a portfolio...

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Accounting

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7. The Capital Asset Pricing Model and the security market line Keith holds a portfolio that is invested equally in three stocks (wD = wA = w-1/3). Each stock is described in the following table Stock Beta Standard Deviation Expected Return DET 0.7 AIL 1.0 INO 1.6 25% 38% 34% 8.0% 10.0% 13.5% 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 [Rr] is 6%, and the market risk premium [RPn] is 4%. Use the following graph with the security market line (SML) to plot each stock's beta and expected return Tool tip: Mouse over the points on the graph to see their coordinates RATE OF RETURN (Percent 20 18 16 Stock DET Stock AIL 12 Stock INO 10 0.0 0.2 0.4 0.6 0.8 1.0 1.2 1.4 1.6 1.8 2.0 RISK (Beta) Clear ALL

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