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In: Finance

Suppose the market premium is 9%, market volatility is 30% and the risk-free rate is 3%....

Suppose the market premium is 9%, market volatility is 30% and the risk-free rate is 3%.

  1. Draw the Security Market Line (SML).                       
  2. Stock X and Y have the following parameters.

X

Y

Beta (β)

0.6

1.2

Beginning Value

K20

K10

Dividend Value

K2

K1

End Value

K21

K10

           

  1. Calculate the returns according to the Capital Asset Pricing Model (CAPM) utilising the market return you plotted in part A.                                                      

  1. Calculate the returns according to the values given in the above parameters.                                                   

  1. Plot stocks X and Y on the SML in part A. clearly indicating the return calculated in parts I. and II.                                                                               

What investment strategy would you recommend for stocks X and Y? Clearly explain your reason for yo

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Expert Solution

jeff jeffy answered 1 year ago
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