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Alfa Ltd currently under consideration is an investment with a beta, b, of 1.5. Currently, the risk-free rate of return RF, is 3%, and the
Alfa Ltd currently under consideration is an investment with a beta, b, of 1.5. Currently, the risk-free rate of return RF, is 3%, and the return on the market portfolio of assets rm is 10%. You believe this investment will earn an annual rate of return of 11%.
- If the return on the market portfolio were to increase by 10%, what would you expect to happen to the investment's return? What if the market return were to decline by 10%.
- Use the capital asset pricing model (CAPM) to find the required return on this investment.
- Based on your calculation in part b, would you recommend this investment? Why or why not?
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