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In a hypothetical market r(j) Beta(j) Asset 1 6% 0.8 Asset 2 10% 1.8 where r(j)= expected return of asset j; beta(j)=beta coefficient of asset
In a hypothetical market
r(j)
Beta(j)
Asset 1
6%
0.8
Asset 2
10%
1.8
where r(j)= expected return of asset j; beta(j)=beta coefficient of asset j.
a. Based on the information from the table above, derive the Security Market Line (SML) (5 points)
b. Suppose that there is a third asset. Beta(3)= 2. Yahoo Finance reports that the average rate of return is 9%. What is the predicted return according to CAPM? (3 points)
c. Is the asset overpriced or underpriced? (2 points)
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