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1. Assume the security market line given below. Assume that analysts have estimated the Beta on the two stocks as follows: Bx = 0.5 and

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1. Assume the security market line given below. Assume that analysts have estimated the Beta on the two stocks as follows: Bx = 0.5 and By = 2. What must the expected return on the two securities be in order for them to be a good purchase? R; = 0.04 +0.08B 2. Assume that the following assets are correctly priced according to the security market line. Derive the security market line. What is the expected return on an asset with a Beta of 2? Ri=6% B=0.5 R2 = 12% B2 = 1.5 3. Using the table below and assuming I = 8, 72 = 4,611 = 2, and 012 = 2.5 calculate the following using the general multi-index model: a. Expected returns. b. Variance of return. c. Covariance of return. Security A B a; 2 3 1 bi 0.8 1.1 0.9 biz 0.9 1.3 1.1 Oci 2 1 1.5

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