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Suppose you have invested $100,000 in the following four stocks.
Security Amount invested Beta Average Return Stock A 20000 0.75 14 Stock B 25000 1.1 13 Stock C 30000 1.36 16 Stock D 25000 1.88 25
The risk-free rate is 5% and the expected market risk premium is 10%.
Assume CAPM holds.
Required: i. Write the equation of the security market line (SML).
ii. Calculate the expected returns of each of the stock and determine which of the stocks that you would recommend to buy.
iii. Calculate the portfolio beta and also the required rate of return of the portfolio.
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