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1) a) Fill in the 8 missing values in the table.

Security

Expected Return

Standard Deviation

Correlation*

Beta

Firm A

.105

.31

=_______

.85

Firm B

.148

=_______

.50

1.40

Firm C

.160

.65

.35

=_______

Market Portfolio

.120

.20

=_______

=_______

Risk–free asset

.050

=_______

=_______

=_______

* with the market portfolio

b) According to the CAPM, Is the stock of Firm A correctly priced (check the correct box)?

Yes □ No (the stock is overpriced) □ No (the stock is underpriced) □

c) According to the CAPM, Is the stock of Firm B correctly priced (check the correct box)?

Yes □ No (the stock is overpriced) □ No (the stock is underpriced) □

d) According to the CAPM, Is the stock of Firm C correctly priced (check the correct box)?

Yes □ No (the stock is overpriced) □ No (the stock is underpriced) □

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