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Karen Kay, a portfolio manager at Collins Asset Management, is using the capital asset pricing model...

  1. Karen Kay, a portfolio manager at Collins Asset Management, is using the capital asset pricing model for making recommendations to her clients. Her research department has developed the information shown in the following exhibit. (15 points)

Security

Expected Return

Standard

Deviation

Beta

A

12%

15%

0.8

B

16%

9%

1.4

Market Return

13%

10%

Risk-Free Rate

5%

    1. With regard to Securities A and B only, which security has the smaller total risk?  
    1. With regard to Securities A and B only, which security has the smaller systematic risk?
    1. Compute the Jensen Alpha for Securities A and B.
    1. Identify and justify which of the 2 stocks would be more appropriate for Karen who would like to make her very first investment in the financial market.
    1. Draw the Security Market Line (SML), labeling each axis, rf, and the slope of the SML. Indicate where securities A and B are located on the graph.  

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jeff jeffy answered 3 years ago
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