Question: Consider the following data for two risk factors (1 and 2) and two securities (J and L): 0 = 0.05 b J1 = 0.80

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

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?

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a In general for the APT ER q l 0 l 1 b q1 l 2 b q2 For security J ER J 005 002x080 004x140 005 00... View full answer

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