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An analyst expects a risk-free return of 4.5 percent, a market return of 14.5 percent, and the returns for Stocks A and B that are

An analyst expects a risk-free return of 4.5 percent, a market return of 14.5 percent, and the returns for Stocks A and B that are shown in the following table.

Stock

Beta

Analyst Estimated Return

A

1.2

16%

B

0.8

14%

Show on the graph

a) Where Stock A and B would plot on the security market line (SML) if they were fairly valued using the capital asset pricing model (CAPM)

b) Where Stock A and B actually plot on the same graph according to the returns estimated by the analyst and shown in the table

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