Consider the following data for two risk factors (1 and 2) and two securities (J and L):
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- Consider the following data for two risk factors (1 and 2) and two securities (J and L):
| rf=0.05 | bJ1 =0.80 |
| r1-rf= 0.02 | bJ2 =1.40 |
| r2-rf= 0.04 | bL1 =1.60 |
| bL2 =2.25 | |
a. Compute the expected returns for both securities.
b. Suppose that Security J is currently priced at $22.50 while the price of Security L is $15.00. Further, it is expected that both securities will pay a dividend of $0.75 during the coming year. What is the expected price of each security one year from now?
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