Question

Your broker has developed a list of firms, their betas, and the return he expects the stock to yield over the next twelve months (labeled "Expected Return"). You have estimated that the risk-free rate is 5% and the return to the market will be 12%. Assuming that CAPM is correct, which stock should you purchase?

Firm	Beta	Expected Return
Anderson, Inc.	0.90	10.5%
Delta Vanlines	1.24	13.0%
Nathan's Bakeries	1.50	16.0%
Z-man Electronics	2.15	19.0%

Answer 1