The risk-free rate is 8% and the expected return on the market is 16%. As an analyst, you are preparing a recommendation report on the following two stocks:

Stock S Stock B

Beta 0.85 1.35

Expected dividend next year $1.10 $4.00

Growth rate (g) 8% 6%

Current Price (p0) $13 $40.50

a) Would you recommend to buy or sell the stocks?

b) At what prices will you change your decision from either “buy” or “sell” to “hold”?

c0 Explain the difference in the standard deviation and beta of a stock. How does it affect in the selection of a stock?