Use security market line method-determine the cost of equity

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Reference no: EM131617332

In 2017, use the Security Market Line method and information below to determine the cost of equity (aka expected return) for Stock A and Stock B.

Use the following information for problem 1.

· The risk free rate is based solely on the on the US treasury yield curve

· The equity market (i.e. the S&P 500) is expected to return 10.0%

· Stock A has a beta (sensitivity to the S&P 500) of 0.80

· Stock B has a beta (sensitivity to the S&P 500) of 1.20

1. Assume the risk-free rate is 2.0%. Which of the following statements is FALSE:

A) Stock A is less sensitive to the performance of the S&P 500

B) Both stocks have the same risk free rate

C) Stock B has a larger market risk premium because it has a higher beta

D) Stock B is expected to outperform Stock A by 2.2%

E) Stock A is expected to return 8.4%

Reference no: EM131617332

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