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Stock A has a beta of 1 and stock B has a beta of 1.5. The expected market return is 11% and the risk-free return
Stock A has a beta of 1 and stock B has a beta of 1.5. The expected market return is 11% and the risk-free return is 5%
a) Can you construct a portfolio with a beta of zero using stock A and stock B? If so, what are their weights?
b) Assuming the CAPM model holds, what is the expected return on the portfolio in part a)?
c) Over the last decade stock A realized an average annual return of 12%, while stock B realized an average annual return of 13%. According to the CAPM, which security was the better buy? Explain
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