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An asset is said to be overvalued if its price is too high, given its expected return and risk. Suppose you observe the following situation:
An asset is said to be overvalued if its price is too high, given its expected return and risk. Suppose you observe the following situation: Assume the risk-free rate is 5% and market risk premium is 6%. Which security is overvalued? Explain. Part B (2 marks) The most important characteristic in determining the expected return of a well-diversified portfolio is the variances of the individual assets. Is this statement correct? Explain
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