Question: A stock has a beta of 1.2 and the standard deviation of its returns is 25%. The market risk premium is 5% and the risk-free rate is 4%.
a. What is the expected return for the stock?
b. What are the expected return and standard deviation for a portfolio that is equally invested in the stock and the risk-free asset?
c. A financial analyst forecasts a return of 12% for the stock. Would you buy it? Why or why not?