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19. Reward-to-Risk Ratios Stock Y has a beta of 1.45 and an expected return of 17 percent. Stock Z has a beta of .85 and an expected return of 12 percent. If the risk-free rate is 6 percent and the market risk premium is 7.5 percent, are these stocks correctly priced?

20. Reward-to-Risk Ratios In the previous problem, what would the risk-free rate have to be for the two stocks to be correctly priced?

21. Portfolio Returns Using information from the previous chapter on capital market history, determine the return on a portfolio that is equally invested in large-company stocks and long-term government bonds. What is the return on a portfolio that is equally invested in small-company stocks and Treasury bills?

22. CAPM Using the CAPM, show that the ratio of the risk premiums on two assets is equal to the ratio of their betas.

Ross et al.: Fundamentals of Corporate Finance, Sixth Edition, Alternate Edition

V. Risk and Return

13. Return, Risk, and the Security Market Line

© The McGraw-Hill Companies, 2002

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