Exhibit 7-4
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S)

question 17

Multiple Choice

Exhibit 7-4
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S) $\begin{array}{ccccc}\text { Stock } & \text { Beta } & \text { Current Price } & \text { Expected Price } & \text { Expected Dividend } \\\hline \mathrm{X} & 0.8 & \$ 12.50 & \$ 13.10 & \$ 0.80 \\\mathrm{Y} & 1.1 & \$ 8.25 & \$ 9.76 & \$ 0.20 \\\mathrm{Z} & 2.1 & \$ 25.70 & \$ 30.04 & \$ 0.00\end{array}$
-Refer to Exhibit 7-4. If the expected return on the market is 11.5% and the risk-free rate of return is 4.5%, then what are the required rates of return for stocks X, Y, and Z based on the CAPM? $\begin{array}{lccc} & \mathbf{X} & \mathbf{Y} & \mathbf{Z} \\\hline \text { I. } & 4.8 \% & 18.3 \% & 16.9 \% \\\text { II. } & 7.2 \% & 20.7 \% & 22.3 \% \\\text { III. } & 10.7 \% & 17.5 \% & 14.4 \% \\\text { IV. } & 10.1 \% & 12.2 \% & 19.2 \% \\\text { V. } & 11.1 \% & 12.2 \% & 21.3 \%\end{array}$

• A) I
• B) II
• C) III
• D) IV
• E) V

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Definitions:

Focus Strategy

A competitive approach where a firm concentrates its resources on entering or expanding in a narrow market segment to achieve a competitive advantage.

Market Segment

A sub-group of a larger market made up of consumers or organizations with similar characteristics that lead them to have similar product and service needs.

Niche Customer Group

A specific segment of the market targeted by businesses for their specialized product or service needs.

Differentiation Strategy

A business approach where a company seeks to distinguish its products or services from competitors through quality, design, or unique features.