Given an Expected Return for the Market of 12 Percent

question 5

Essay

Given an expected return for the market of 12 percent, with a standard deviation of 20 percent, and a risk-free rate of 8 percent, consider the following data:
$\begin{array}{lll}\underline {Stock}&\underline { Beta }&\underline { \mathrm{R}_{\mathrm{i}}(\%) }\\1 & 0.8 & 12 \\2 & 1.2 & 13 \\3 & 0.6 & 11\end{array}$ (a) Calculate the required return for each stock using the SML.
(b) Assume that an analyst, using fundamental analysis, develops the estimates labeled R_i for these stocks. Which stock would be recommended for purchase?

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Definitions:

Insurance Cost

Insurance cost is the expense incurred in purchasing insurance policies, offering protection against potential financial losses.

Safety Reserves

Funds or stocks kept on hand by an organization or individual as a buffer against potential shortfalls or emergencies.

Obsolescence Cost

Obsolescence cost refers to the loss of value of an asset due to technological advancements, changes in market demand, or regulatory changes.

Economic Order Quantity

A formula used to determine the most cost-effective quantity to order to minimize the costs of holding and ordering inventory.