1. The market portfolio (M) has the expected rate of return E(rm) = 0.12. Security A...

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1. The market portfolio (M) has the expected rate of return E(rm) = 0.12. Security A is traded in the market. We know that E(A) = 0.17 and BA = 1.5. (a) What is the rate of return of the riskfree asset (rf)? (b) Security B is also traded in the market. B = rate of return of security B according to the CAPM? 0.8. Then what is "fair" expected = 0.6, and from the (c) Security C is a third security traded in the market. Bc market price, investors calculate E(rc) = 0.1. Is C overpriced or underpriced? What is ac? 1. The market portfolio (M) has the expected rate of return E(rm) = 0.12. Security A is traded in the market. We know that E(A) = 0.17 and BA = 1.5. (a) What is the rate of return of the riskfree asset (rf)? (b) Security B is also traded in the market. B = rate of return of security B according to the CAPM? 0.8. Then what is "fair" expected = 0.6, and from the (c) Security C is a third security traded in the market. Bc market price, investors calculate E(rc) = 0.1. Is C overpriced or underpriced? What is ac?

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To answer these questions using the Capital Asset Pricing Model CAPM we will use the formula Era rf ... View the full answer