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Part III. Consider three assets with the following expected returns and standard deviations: Asset Cit Lama Wools Market 24% 85% 10% 10% Standard deviation 575%
Part III. Consider three assets with the following expected returns and standard deviations: Asset Cit Lama Wools Market 24% 85% 10% 10% Standard deviation 575% 14% 21 5% 5% The risk free rate of interest is 3%. This stock market is in equilibrium according to the capital asset pricing model (CAPM) (d) Two new securities, Roll and Nicks, are introduced to this market at prices which imply expected returns of 13% and 9%, respectively, and expected beta values of 1.8 and 0.7, respectively. Do shares Roll and Nicks lie on the Security Market Line? Explain [8 Marks] how the market will move back into CAPM equilibrium
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