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#1. Answer both of the following: Consider the following information: the risk-free rate is 3%, and the expected rate of retu

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Answer #1

1.
Required return=risk free rate+beta*(market return-risk free rate)=3%+1.5*(12%-3%)=16.50%

As it is offerring lower return of 12%, do not buy i.e., short the stock

2.
=(market return-risk free rate)
=8%-2%
=6%

Equation of CML: return=2%+6%/10%*standard deviation

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