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

Question:

λ₀= 0.05 b_J1 = 0.80

λ₁= 0.02 b_J2 = 1.40

λ₂ = 0.04 b_L1 = 1.60

b_L2 = 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?

Dividend
A dividend is a distribution of a portion of company’s earnings, decided and managed by the company’s board of directors, and paid to the shareholders. Dividends are given on the shares. It is a token reward paid to the shareholders for their...