Question

The stock of Swanson, Inc., is expected to return 24% annually. The stock of Redford, Inc.,...

The stock of Swanson, Inc., is expected to return 24% annually. The stock of Redford, Inc., is expected to return 32% annually. The beta of the Swanson stock is 1.80, and the beta of the Redford stock is 2.20. The risk-free rate of return is expected to be 2%, but the return on the market portfolio is 15%. The Problem & Following 2
Based on the Security Market Line (SML), what is the required rate of return for Swanson?
Question 25 options:

The required rate of return for Swanson is 29.0%.
The required rate of return for Swanson is 23.4%.
The required rate of return for Swanson is 25.4%.
The required rate of return for Swanson is 27.0%.

Question 26 (3.33 points)

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Continued from the question above, based on the Security Market Line (SML), what is the required rate of return for Redford?
Question 26 options:

The required rate of return for Bedford is 28.6%.
The required rate of return for Bedford is 35.0%.
The required rate of return for Bedford is 30.6%.
The required rate of return for Bedford is 33.0%.

Question 27 (3.33 points)

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Continued from above two questions, comparing the required rates of return calculated using SML with the expected returns provided, which security is a better buy?
Question 27 options:

Redford is a better buy since the required rate of the return is greater than the expected return.
Redford is a better buy since the required rate of the return is less than the expected return.
Swanson is a better buy since the required rate of the return is greater than the expected return.
Swanson is a better buy since the required rate of the return is less than the expected return.

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Answer #1

25)

Hence the correct option is The required rate of return for Swanson is 25.4%.

26)

Hence the correct option is The required rate of return for Redford is 30.6%.

27)

Swanson Required return > Expected return

Hence it should sell

Redford  Required return < Expected return

Hence it should buy

Hence the correct option is Redford is a better buy since the required rate of the return is less than the expected return.

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