Question

The security market line is estimated to be k=8% + (10.6% - 8%)β. You are considering...

The security market line is estimated to be

k=8% + (10.6% - 8%)β.

You are considering two stocks. The beta of A is 1.0. The firm offers a dividend yield during the year of 4 percent and a growth rate of 6.3 percent. The beta of B is 0.6. The firm offers a dividend yield during the year of 5.3 percent and a growth rate of 5.7 percent.

A. What is the required return for each security? Round your answers to two decimal places.

Stock A

Stock B

B. Why are the required rates of return different?

The difference in the required rates of return is the result of (Stocck A OR B) being riskier.

C.Since A offers higher potential growth, should it be purchased?

Stock A ( should or should not) be purchased

D. Since B offers higher dividend yield, should it be purchased?

Stock B (SHOULD or SHOULD NOT) be purchased.

E. Which stock(s) should be purchased? ( Both, Neither, A, or B)

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