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The security market line (SML from the CAPM) depicts the relation between risk and required rates of return. Describe what happens to asset prices (i.e.,
The security market line (SML from the CAPM) depicts the relation between risk and required rates of return. Describe what happens to asset prices (i.e., the equilibrium process) if we find that stock A has a higher expected return than predicted by the SML and stock B has a expected return lower than the SML prediction. What is equilibrium? When stock A and B are in equilibrium what is true about their risk and reward characteristics?
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