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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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