Purchase Solution

# Security market Line and Capital Asset Pricing Model

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Question 1. How are the SML and the CAPM related (Draw the appropriate graphs and explain)?

Question 2. A stock's current dividends are \$1.50 and its expected to grow at 10 percent annually. Suppose its required rate of return equals 15 percent. The stock's recent market price is \$120. What is its intrinsic value? Would you invest in the stock using fundamental analysis?

##### Solution Summary

The solution discusses Security market Line and Capital Asset Pricing Model and calculates the intrinsic value of a stock.

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Question1. How are the SML and the CAPM related? (Draw the appropriate graphs and explain)?

CAPM (Capital Asset Pricing Model) equation is:
r A= r f + beta A (r m - r f)
where:
r A = required/ expected return on any security or portfolio
r f = risk free rate
beta A =beta of any security
rm = return on market portfolio

The CAPM equation thus says that the expected return on any security or portfolio is equal to the risk-free rate plus a risk premium. The CAPM equation ...

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