Compute the expected return for the following stocks

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1. a. You expect an RFR of 10 percent and the market return ( R M ) of 14 percent. Compute the expected return for the following stocks, and plot them on an SML graph.

Stock B e t a )

U 0.85

N 1.25

D -0.20

b. You ask a stockbroker what the firm's research department expects for these three stocks. The broker responds with the following information:

Stock

Current Price

Expected Price

Expected Dividend

U

22

24

0.75

N

48

51

2.00

D

37

40

1.25

Plot your estimated returns on the graph from Part a and indicate what actions you would take with regard to these stocks. Explain your decisions.

Reference no: EM13844936

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