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III. The table presents the annual expected returns and standard deviations for three portfolios and for the market index: Asset City Lama Wools Market index

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III. The table presents the annual expected returns and standard deviations for three portfolios and for the market index: Asset City Lama Wools Market index E(r) 13.5% 8.6% 10% 10% Standard deviation 26.25% 16% 27.5% 17.5% The risk-free rate of interest is 3%. This stock market is in equilibrium according to the capital asset pricing model (CAPM). (a) Calculate and interpret the beta value of each of these three portfolios. (8 marks) (b) Do these three portfolios lie on the Capital Market Line and what do you conclude from this? (8 marks) (c) Two new assets, Roll and Nick, are introduced to this market at prices which imply expected returns of 13% and 9%, respectively. The expected beta values are 1.8 and 0.7, respectively. Do Roll and Nick lie on the Security Market Line and what do you conclude from this? (9 Marks)

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