The stock of Aardvark Enterprises has a beta of 1.5 and that of Zebra Enterprises has a beta of .7. The risk-free rate is assumed to be 3 percent, and the difference between the expected return on the market and the risk-free rate is assumed to be 8.0 percent. The expected returns on the two securities are:

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E(RAardvark) = .03 +1.5(.08) = .15, or 15% E(RZebra) = .03 +.7(.08) = .086, or 8.6%