What is the return on a stock according to the security market line if the

# What is the return on a stock according to the security market line if the

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What is the return on a stock according to the security market line if the risk-free rate is 6%, the return on the market is 10%, and the stock’s beta is 1.5? r s = r f + (r m - r f ) beta Return on stock = risk-free rate of interest + (return on market – risk free rate of interest) beta X = 6 + (10 - 6) x 1.5 = 6 + 4 x 1.5 = 6 + 6 = 12% return on the stock If the beta had been 2.0, what would be the return? X = 6 + (10 - 6) x 2.0 = 6 + 4 x 2.0 = 6 + 8 = 14% return on the stock
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Unformatted text preview: Is the higher return consistent with the portfolio theory explained in this chapter? Why? Yes, the higher the beta coefficient the more systematic market risk is associated with the individual stock. In the example above, the investment with the higher beta did bring a higher return on investment. I would say that because the return grew as the risk increased, this example is consistent with the portfolio theory....
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