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a) Assuming the capital asset pricing model holds, and the sum of stock As and Bs betas equals 2.2. What is the expected market risk

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a) Assuming the capital asset pricing model holds, and the sum of stock As and Bs betas equals 2.2. What is the expected market risk premium if the risk-free rate is 1.6%?

b) Assume another stock named stock C exists. Using the following relationship between the betas of stocks A, B, and C, calculate the expected return on Stock C. C=(2A+3B)5

Rate of Return if State Occurs State of Probability Economy of State Stock A Stock B Recession 0.30 -0.08 -0.08 Normal ? 0.14 0.16 Irrational exuberance 0.20 0.45 0.30

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