In 2017, use the Security Market Line method and information below to determine the cost of equity (aka expected return) for Stock A and Stock B.
Use the following information for problem 2.
· The risk free rate is based solely on the on the US treasury yield curve
· The equity market (i.e. the S&P 500) is expected to return 10.0%
· Stock A has a beta (sensitivity to the S&P 500) of 0.80
· Stock B has a beta (sensitivity to the S&P 500) of 1.20
2. Assume an instantaneous shift in the yield curve from 2.0% to 4.0%. Which of the following statements is TRUE:
A) After the shift, both Stock A & Stock B will have a higher expected return than before the shift
B) Before the shift, both Stock A & Stock B will have a higher expected return than after the shift
C) After the shift, only Stock A will have a higher expected return than before the shift
D) After the shift, only Stock B will have a higher expected return than before the shift
E) The shift will have no impact on the expected returns of either stock.