Question
Assume that the risk free rate is 9% and the market return is 13%. Asset A has a beta of 0.8 and asset B has
Assume that the risk free rate is 9% and the market return is 13%. Asset A has a beta of 0.8 and asset B has a beta of 1.3. Required: i. Draw securities market line on a set of non-diversifiable risk and required return. ii. Calculate the market risk premium and mentioned on the graph. iii. Calculate the required return of each asset and plot assets in the graph (part i) and mentioned whether assets are overvalued or undervalued. iv. Based on this information, further describe an investor should buy or sell which asset? v. Discuss the possible changes in the SML graph if expected inflation increased or decreased?
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