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

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Accounting

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8. The Capital Asset Pricing Model and the security market line Keith holds a portfolio that is invested equally in three stocks (wD WA wIE 1/3). Each stock is described in the following table: Stock Beta Standard Deviation Expected Return 25% DET 0.7 8.0% 10.0% AIL 1.0 38% INO 1.6 34% 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 [rRF] 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 return. Tool tip: Mouse over the points on the graph to see their coordinates. RATE OF RETURN (Percent) Stock DET 20 Stock AIL 14 12 Stock INO 10 6 O 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 Aa Aa E

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