Consider the following data for two risk factors (1 and 2) and two securities (J and L):

₀ = 0.07₁ = 0.04₂ = 0.06

b_J1 = 0.10b_J2 = 1.60b_L1 = 1.80b_L2 = 2.45

a.Compute the expected returns for both securities.

b.Suppose that Security J is currently priced at $50 while the price of Security L is $15.00. Further, it is expected that both securities will pay a dividend of $0.95 during the coming year. What is the expected price of each security one year from now?

c.Compute the correlation between stock A and stock B considering the following data.

Standard deviation of stock A = 10 percent Standard deviation of stock B = 17 percent Covariance between the two stocks = 90.