The risk-free rate of return is 4%, and the market return is 10%. The betas of Stocks A, B, C, D, and E are 0.85, 0.75, 1.20, 1.35, and 0.5 respectively. The expected rates of return for Stocks A, B, C, D, and E are 7%, 9%, 9.5%, 12.1%, and 14% respectively. Which of the above stocks would an investor be indifferent towards buying or selling?

Stock D as their expected return matches the Capital Assets Price Models

Explanation:

We have to calcualte the CAPM for each stock and look which matches with the expected rate of return:

risk free =0.04

market rate =0.1

premium market = (market rate - risk free)0.06

Stock A

beta(non diversifiable risk) =0.85

Ke0.09100 = 9.1%

Expected return: 7% it would prefer to sale

Stock B

beta(non diversifiable risk) =0.75

Ke0.08500 = 8.5%

Expected return: 9%  it would prefer to purchase as it offer more

Stock C

beta(non diversifiable risk) =1.2

Ke0.11200 = 11.20%

Expected return: 9.5%  it would prefer to sale

Stock D

beta(non diversifiable risk) =1.35

Ke0.12100 = 12.1%

Expected return: 12.1% Indifferent as it is mathces the CAMP the stock is neither overperforming nor underperforming

Stock E

beta(non diversifiable risk) =0.5

Ke0.07000 = 7%

Return = 14%  It would prefer to purchase as it offer more

answer; post closing trial balance;

answer; yield to maturity;