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    Important Information About Expected Returns and Betas for Investment Selection

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    Please help with the following problem.

    You have been scouring The Wall Street Journal looking for stocks that are "good values" and have calculated the expected returns for five stocks. Assume the risk-free rate (rRF) is 7 percent and the market risk premium (rM - rRF) is 2 percent. Which security would be the best investment? (Assume you must choose just one).

    Expected Return Beta
    a. 9.01% 1.70
    b. 7.06% 0.00
    c. 5.04% -0.67
    d. 8.74% 0.87
    e. 11.50% 2.50

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    Solution Preview

    Expected Return Beta
    a 9.01% 1.70
    b 7.06% -
    c 5.04% -0.67
    d 8.74% 0.85
    e 11.50% 2.50

    We should find the required rate of return on each stock and compare with the expected return.

    Stock a
    Required return on Stock = ...

    Solution Summary

    This solution is comprised of a detailed explanation to answer which security would be the best investment, including an excel spreadsheet with more detailed calculations attached.

    $2.19

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