A. An analyst expects a risk-free return of 4.5%, a market return of 14.5% and...
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A. An analyst expects a risk-free return of 4.5%, a market return of 14.5% and the returns for stocks A and B that are shown in the following table: Analyst's Estimated Return Stock Beta A 1.2 16% 0.8 14% (i) If stocks A and B were fairly valued using the capital asset pricing model (CAPM), show by means of a graph, where each stock would plot on the security market line (SML). (ii) Show where stocks A and B actually plot on the same graph according to the returns estimated by the analyst and shown in the table above. (iii) State whether stocks A and B are undervalued or overvalued if the analyst uses the SML for strategic investment decisions. Explain your answer in each case
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