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Problem 2. Here are data on two companies. The T-bill rate is 4% and the market risk premium is 6%. What would be the fair
Problem 2. Here are data on two companies. The T-bill rate is 4% and the market risk premium is 6%. What would be the fair return for each company, according to the capital asset pricing model (CAPM)? Characterize each company in the previous question as underpriced, overpriced, or properly priced.
Company | $1 Discount Store | Everything $5 |
Forecasted return | 12% | 11% |
Standard deviation of returns | 8% | 10% |
Beta | 1.5 | 1.0 |
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