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 1.
· 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
1. Assume the risk-free rate is 2.0%. Which of the following statements is FALSE:
A) Stock A is less sensitive to the performance of the S&P 500
B) Both stocks have the same risk free rate
C) Stock B has a larger market risk premium because it has a higher beta
D) Stock B is expected to outperform Stock A by 2.2%
E) Stock A is expected to return 8.4%