Given an Expected Return for the Market of 12 Percent

question 53

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:
$\begin{array} { c c c } \underline { \text { Stock } } & \underline { \text { Beta } }& \underline { \mathrm { R } _ { \mathrm { i } } ( \% ) } \\1 & 0.8 & 12 \\2 & 1.2 & 13\\3&0.6&11\end{array}$
(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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