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Consider the following data for two risk factors (1 and 2) and two securities (J and L): 0 = 0.05 b J1 = 0.80 1 = 0.02 b J2 = 1.40 2 = 0.04 b L1 =

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?

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...

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a In general for the APT E R q l 0 l 1 b q1 l 2 b q2 For security J E R J 0 05 0 02x…View the full answer


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Investment Analysis and Portfolio Management

Investment Analysis and Portfolio Management

ISBN: 978-0538482387

10th Edition

Authors: Frank K. Reilly, Keith C. Brown

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Posted Date: December 17, 2014 10:38:09
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