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Use the SML to determine the required rate of return for the following securities: Security 1...

  1. Use the SML to determine the required rate of return for the following securities: Security 1 has a beta of 5, Security 2 has a beta of 0.5. The risk free rate is 0.025 and the market required rate of return is 0.1
  2. Suppose that the expected rate of return for Security 1 is 0.13 and the expected rate of return for Security 2 is 0.10. Explain what happens in this market, if anything.
  3. Suppose that the required rate of return for the market increases to .12 all other things equal. What is the new required rates of return for Securities 1 and 2? Why did they not increase by the same amount?
  4. Use the SML to determine the required rates of return for the following securities: Security 3 has a beta of 1.78 and Security 4 has a beta of 0.6 The risk free rate of return is 0.015 and the market required rate of return is 0.08.
  5. Now suppose that the risk free rate in problem 4 increased to 0.025 and the market risk premium remained the same. What are the required rates of return for Securities 3 and 4. Explain your results.

Please show work for every step. Thank you

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Expert Solution

SEE THE IMAGE. ANY DOUBTS, FEEL FREE TO ASK. THUMBS UP PLEASE

jeff jeffy answered 1 year ago
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