Question
Suppose you observe the following situation: Security T21.1 T15.9 Beta 2.38 0.88 Expected Return 21.1 15.9 Requirement-A. If the current market data shows that the
Suppose you observe the following situation:
Security | T21.1 | T15.9 |
Beta | 2.38 | 0.88 |
Expected Return | 21.1 | 15.9 |
Requirement-A. If the current market data shows that the risk-free rate is 4.38 percent, are these securities correctly priced?
Requirement-B. What would the risk-free rate have to be if these securities are correctly priced?
Requirement-C. If these two securities are correctly priced, find the market risk premium (using the findings of Requirement-B).
Requirement-D. Draw the Security Market Line (SML) with clear labels, and plot these two securities on the graph along with the market and risk-free rate (using the findings of Requirements B and C).
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