a. You expect an RFR of 10 percent and the market return (RM) of 14 percent. Compute the expected return for the following stocks, and plot them on an SML graph.

 

 Stock                         Beta                   E( Ri )     

U                             0.85

N                             1.25

D                            −0.20

b. You ask a stockbroker what the firm’s research department expects for these three  stocks. The broker responds with the following   information:

 

Stock	Current Price	Expected  Price	Expected  Dividend
U	22	24	0.75
N	48	51	2.00
D	37	40	1.25

Plot your estimated returns on the graph from Part a and indicate what actions you  would take with regard to these stocks. Explain your  decisions.