# Question

Consider the following data for two risk factors (1 and 2) and two securities (J and L):

λ0 = 0.05 bJ1 = 0.80

λ1 = 0.02 bJ2 = 1.40

λ2 = 0.04 bL1 = 1.60

bL2 = 2.25

a. Compute the expected returns for both securities.

b. Suppose that Security J is currently priced at $22.50 while the price of Security L is $15.00. Further, it is expected that both securities will pay a dividend of $0.75 during the coming year. What is the expected price of each security one year from now?

λ0 = 0.05 bJ1 = 0.80

λ1 = 0.02 bJ2 = 1.40

λ2 = 0.04 bL1 = 1.60

bL2 = 2.25

a. Compute the expected returns for both securities.

b. Suppose that Security J is currently priced at $22.50 while the price of Security L is $15.00. Further, it is expected that both securities will pay a dividend of $0.75 during the coming year. What is the expected price of each security one year from now?

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